Borrowers split on interest-only loans

by Rebecca Pike28 Nov 2018

A recent survey has shown a 50-50 split in opinion on whether interest-only loans are a good or a bad thing.

According to customer-owned Gateway Bank’s study, the negative sentiment towards interest-only loans has risen by 2% year on year.

It echoes other recent market movements which suggest mortgage holders are moving away from interest-only to principal and interest arrangements early.

Gateway said it reflected the current regulatory environment with the Australian Prudential Regulation Authority (APRA) maintaining its 30% cap on interest-only lending despite lifting benchmarks on investor loans in April.

Earlier this year, the Reserve Bank of Australia (RBA) also warned that $120billion of interest-only mortgages were due to reach the end of their interest-only period in the next three years.

Regardless of the rise in negative sentiment and widespread warnings, this year the number of people who have used or considered an interest-only home loan has increased by 4% year-on-year.

Paul Thomas, CEO at Gateway Bank, warned that those on interest-only repayment plans should finalise their financial strategies now to ensure shortfalls in their budget will not become critical.

He added, “Mortgage holders currently on interest-only repayments should make financial planning and budgeting a core priority well in advanced of the end of their interest-only period.

“The RBA has estimated that for many Aussies, repayments could be set to rise up to 40% as loans roll over to principal and interest.

“This is a significant surge that will surely hit hard for families’ bottom lines so it’s never too early to start planning for the upcoming increases in repayment obligations. In fact, the earlier the better.”

Earlier this year, the RBA released a statement on the limitations of interest-only lending, within which it estimated that around 30% of all outstanding national mortgage debt will reset from interest only to principal and interest, increasing the monthly repayments for almost 1.5 million borrowers. 

While repayment increases will prove to be a challenge for many, Thomas believes it also presents an opportunity for homeowners to begin building equity on their properties.

He said, “The affordability of an interest-only home loan may be appealing, but Aussies should avoid the trap of extending their interest-only period or refinancing to another interest-only loan as it will distance them further from financial freedom.

“The earlier you begin to switch to principal and interest repayments, the sooner you’ll be able to build up equity on your properties and grow your wealth.”

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