ASIC allow switching from principal and interest to interest only

ASIC has provided confirmation to lenders that a change from principal and interest to interest only repayments can be made if a consumer requests to reduce their repayments and in the short-term.

ASIC has advised that these variations no longer trigger Responsible Lending obligations and contract variations can be agreed between the lender and the borrower.

Nila Sweeney from the Australian Financial Review, published her exclusive overnight, for which I provided some insights, in her article “No breach for lenders as homeowners switch to interest-only.”

Changing a loan from principal and interest to interest only could be a viable alternative to a repayment holiday for many borrowers. Especially given most repayment pauses result in a higher repayment at the end of the non-repayment period. This is because the interest is capitalising into a larger debt.

The ball is now in the lender’s court to review their internal processes and decide how they will implement these Responsible Lending guideline changes and if any criteria will need to be met.

We suspect lenders will be offering this alternative option by the end of the week, allowing borrowers to switch from P&I to three-month interest only terms for those eligible, with the potential to extend out to six-months. This time frame would be in line with the other assistance measures on offer.

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