Rise in interest-only loans causing more concern

by Julia Corderoy30 Sep 2014
There is further scepticism about interest-only home loans after almost double the number of Australians were comparing interest-only loans online in September.

Comparison website finder.com.au said that 81% of users were comparing interest-only home loans this month, which is almost double the number in the same time last year. 

The Reserve Bank flagged the rise in interest-only loans in its Financial Stability Review released last week.

“Another feature worthy of close monitoring is the aggregate interest-only share of banks’ new lending, which has continued to increase for both investors and owner-occupiers in 2014,” the RBA said.

According to APRA figures, over one in three loans financed in the June quarter were interest-only, which is the highest level since this data was collected in 2008.

Michelle Hutchison, spokesperson at finder.com.au said that with the average home loan also reaching a record high of $319,000, which is $24,000 higher than last year, there is a genuine concern for borrower’s taking on too much risk. 

“It's a real concern to see borrowers taking on more risk because interest rates are at record lows and expected to rise next year, which means borrowers can find themselves in financial trouble if they take on more debt than they can afford,” she said.

Although, even though the Reserve Bank will be keeping a close eye on interest-only loans, the bank said the rise doesn’t necessarily mean borrowers and banks are being risky. 

“It does not necessarily mean that borrowers are taking on debt that they may not be able to service if both interest and principal repayments are made. Rather, some of these borrowers are likely to be building up buffers in offset accounts.”