NAB’s former CEO issues dire warning about interest-only loans

Font size :

Don Argus, former CEO of National Australia Bank, has added to warnings about the banking industry’s overreliance on interest-only home loans, declaring that borrowers would be reduced “to tears” once interest rates eventually move higher.

After the widely anticipated decision by the Reserve Bank to leave the official cash rate on hold at the record low setting of 1.5% on Tuesday, Argus said that borrowers had forgotten the cyclical nature of interest rates.

“You can only hope that some of these dizzy values that you see people paying for houses now, you hope that they stand up on any correction, any economic ­correction,” he told The Australian.

Expressing his support for APRA’s most recent attempts to place curbs on interest-only mortgage lending, Argus said that the capacity of borrowers to repay loans “was always a primary concern in housing loans of yesteryear.”

“If you progressed to just an interest-only environment, that’s only going to lead to tears,” he said.

Argus’ criticism strongly echoes that of RBA governor Philip Lowe, who gave a speech at the Reserve Bank Board Dinner in Melbourne on Tuesday night. Lowe called out banks and other lenders for making overly generous serviceability assessments.

“Despite the focus on this area over recent times, too many loans are still made where the borrower has the skinniest of income buffers after interest payments,” he said. “In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong. So APRA quite rightly has said lenders can expect a strong supervisory focus on loans with a very low net income surplus.”

“I think people are seduced by the low-interest-rate environment, and they’ve forgotten interest rates are cyclical and they go with the economy,” Argus said.

People who experienced the economic environment of 1989 and 1990, when mortgage interest rates hit double-digits, understand the pain of dealing with higher interest rates.

Argus also slammed banks for allocating too much of their lending to the housing market, saying that the warning he issued in 2010 that the big banks risked becoming “giant building societies” still held true today.

Whether you are looking to buy your first home, move home, refinance, or invest in property, a mortgage broker can help. Access loans from all the major lenders, get help with paperwork – plus there is no charge for this service. Get help from a local mortgage broker

Mortgage News and Articles

How to tell when a housing market is cooling How to tell when a housing market is cooling

You need to check clearance rates, listings, and the price gap, among other factors Read more

Growing demand for green apartments in Sydney Growing demand for green apartments in Sydney Both owner-occupiers and investors favour eco-friendly buildings for their energy-saving features and reduced environmental footprint ... Read more

Are property investors as rich as they appear? Are property investors as rich as they appear? A multi-property portfolio doesn’t guarantee easy millions ... Read more

Be proactive about getting a better mortgage deal Be proactive about getting a better mortgage deal Apathy could be costing you a considerable amount of money over the lifespan of your loan ... Read more

More mortgage news and articles

Sponsored Links

Thursday, Sep 21, 2017
Top Featured Rates
Top Bank Rates

Get help choosing the right home loan

Let us help you find the right home loan for your needs.

Tell us a bit about your circumstances:
  • Purpose of mortgage
  • Household Income
  • How much do you want to borrow?
  • How much deposit do you have?
  • How much is your house worth?
  • How much do you still owe on your mortgage?
  • What type of mortgage do you have?

  • How much is your new home?
  • How much do you want to borrow?
  • How soon do you want a mortgage?
  • First name
  • Last name
  • Where do you live?
  • Phone number

Special Offers

Related Keywords