ASIC chairman Greg Medcraft echoes RBA governor’s debt fears

ASIC chairman Greg Medcraft has warned home buyers and banks to reconsider lending terms as rates appear set to rise.

ASIC chairman Greg Medcraft. (The Australian/Luis Enrique Ascui)

The Australian Securities and Investments Commission chairman Greg Medcraft has warned Australians to reconsider if they can afford to borrow to buy a home as interest rates will rise.

The warning comes after Reserve Bank governor Philip Lowe said he is concerned banks are lending to people who cannot afford to repay their debts as housing debts are rising much faster than household incomes.

Mr Medcraft refused to be drawn on what the answers were to the housing dilemma in Sydney and Melbourne but said his greatest worry was that people were taking on debt without considering that interest rates will rise.

“Our biggest concern is just warning people that interest rates will go up and you need to be really careful about assessing whether you can really afford that mortgage and if you’ve got an interest only loan,” he told ABC Radio.

Some borrowers may never be able to pay their principal, Mr Medcraft said.

“If you don’t pay any principal in say the first five years you’re paying away a lot of money I think an extra $37,000 over the first five years and you’re paying a higher margin,” Mr Medcraft said.

“So it’s far better to think about paying principal interest back and it may be for some people it may mean you will never own that home because you’ll never be able to pay back the principle”.

He said the banks needed to act to protect their customers.

“The government is a matter for the government. The banks need to act because that’s in their interest for their borrowers putting their customers first and doing the right thing to make sure people are not in over their heads,” he said.

New figures showing galloping house prices released this week by property analytics firm CoreLogic have put house prices back on the agenda.

House prices in Australia’s capital cities have risen 12.9 per cent compared with this time last year, with a surge of 18.9 per cent in Sydney and 15.9 per cent in Melbourne, according to the data.

On Tuesday, Dr Lowe hit out at the banks use of ­interest-only loans which allow borrowers to purchase a home with no commitment to repay principal for the first few years.

He said the ­popularity of interest-only loans was partly due to “taxation ­arrangements that apply to investment in residential property in Australia”.

Labor Shadow Treasurer Chris Bowen said it was a “strong intervention” by Dr Lowe and said it bolstered their case for changes to negative gearing and capital gains tax breaks.