Banks and brokers caution about rise in interest-only loans

by Julia Corderoy26 Sep 2014
As mortgage customers are increasingly opting for interest-only loans, banks and brokers are warning of the risks in the long-term. 

According to News Ltd, ING Direct data shows one quarter of owner occupiers taking out new loans opt for interest-only repayments, while NAB data shows that 32% of all new home loans taken out by owner occupiers and investors are for interest-only repayments.

Steven Degetto, Suncorp Bank Head of Intermediaries told Australian Broker that interest-only loans can be an attractive strategy for investors, but owner occupiers should always think twice. 

“While interest only repayments can be a sound strategy for some property investors looking to manage cash flow or build wealth through property, in most cases those borrowers taking out a mortgage for owner occupied purposes would be wise to pay off as much off both the principal and interest of their loan as quickly as possible and reduce their debt sooner. The clear disadvantage of paying interest only on a home loan is that you’re not making any headway on your overall mortgage and therefore aren’t building equity in your home.”

Oscar Hvala, mortgage broker at Aussie told Australian Broker interest-only loans may provide some relief in the short-term, but should not be a part of a consumer’s – both investor and owner occupier – long term plan.

“For most investors and owner occupiers, interest-only loans should be used sparingly and only for short term periods. 

“In the short term it can be helpful to minimise financial obligations per payment period and help manage those ‘heavy’ expense months – and there are some tax advantages for investors – but the intention should be to pay off a home loan.

“In the long term, it may be risky for investors as it relies on the property value to increase to attain capital gain. Whilst for owner occupiers, it not only means their mortgage will take longer to pay off, but it may create a false sense that they can afford the loan which may cause financial stress when the principal and interest payments take effect.”