The CBA is putting mortgage brokers who recommend interest-only loans under greater scrutiny

Photo: Spencer Platt/ Getty Images.

The Commonwealth Bank is clamping down on mortgage brokers who are recommending interest-only loans to prospective borrowers.

According to the Australian Financial Review (AFR), Australia’s largest residential lender has written to mortgage brokers warning that applicants that select interest-only payments must “fully understand the outcomes” of choosing interest-only payments.

“This includes no reduction in principal while on interest-only, higher interest rates and rollover to higher repayments at the end of the IO period,” it said in a confidential memo to mortgage brokers seen by the AFR.

The memo says brokers will have to provide documented evidence to the bank that they explained the potential risks of interest-only mortgages, even if they decide not to go ahead with that type of loan.

“We encourage our customers to choose principal and interest repayments. Those who currently make interest only payments are encouraged, where they are able, to switch to principal and interest repayments,” a CBA spokesman told the AFR.

The push-back from the CBA follows moves from Australia’s banking regulator, APRA, to limit the proportion of new interest-only loans to 30% of total new residential mortgage lending.

On a top of a 10% annual cap on investor credit growth introduced in December 2014, it was seen as another measure to curtail growing financial stability concerns from increased investor activity in Australia’s housing market.

The cap on interest-only lending, introduced in late March, saw the percentage of loans in this category fall back to 30% of all new lending in the June quarter, below the 36% level of the previous quarter.

The AFR has more here.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.