The home loan industry is already beginning to squirm. Only days after the financial system Inquiry report was handed down from David Murray lenders are receiving scrutiny from regulators, and they don’t like it one bit.

Both the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment commission (ASIC) have turned their attention to the rise in interest-only loans for both investors and owner occupiers.

September figures from the Reserve Bank indicate that of all new owner occupier home loans a staggering 31 per cent were interest-only. For investors this figure more than doubled to 64 per cent.

The mortgage industry has found an unlikely ally in the form of Mortgage Choice. Chief executive Michael Russell told reporters, “I’m not sure why that personal decision (to have an interest-only loan) s being mooted to be taken away from them (consumers).

“I don’t think now is the time that we should be receiving any regulator interference in an attempt to cool down housing demand.

“We are in the process of transitioning from mining investment to retail and housing construction which we need to remain a strong contributor to GDP and employment.”

As the name suggests – interest only loans do not enable the borrower to pay off the principle over time. Borrowers must pay out the principal in full. Of course the interest paid on the loan in ongoing throughout the life of the loan, but at no stage do borrowers have any equity in their property until they amortize the loan.

Industry experts are afraid that regulatory oversight on these loans may lead to an over correction in the already cooling housing market.

How this might come about, no one has said.

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