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

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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.

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