Aussies divided over interest-only home loans

By Stephanie Aikins

November 28 2018
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Half of Australians think interest-only home loans are bad news, a new report has found, despite an increase in those using or considering this type of mortgage.

According to Gateway Bank’s latest Mortgage Holders’ Sentiment Report, Australians are split down the middle when it comes to their views on interest-only mortgages in comparison to principal and interest arrangements.

Negative sentiment towards interest-only home loans has grown by 2 per cent year-on-year, mirroring recent market movements that indicate mortgage holders are transitioning from interest-only to principal and interest arrangements earlier than necessary.

This unfavourable view is believed to be due, at least partially, to the current regulatory environment, with APRA maintaining its 30 per cent cap on interest-only lending, even after it lifted standards on investor loans in April.

This is despite the Reserve Bank of Australia issuing a warning earlier this year regarding the near 30 per cent of mortgages that are set to transfer from interest-only to principal and interest home loans over the next three years.

According to the RBA, the rollover period will see close to 1.5 million borrowers hit with higher monthly repayments, as $120 billion worth of interest-only mortgages become principal and interest.

Despite the negative sentiment, the number of individuals who have either used or considered entering into an interest-only mortgage arrangement has actually risen by 4 per cent year-on-year.

Paul Thomas, CEO at Gateway Bank, says it is important that those with interest-only home loans create a financial strategy now to ensure they can meet the increased repayments after the rollover into principal and interest.

“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,” he said.

“The RBA has estimated that for many Aussies, repayments could be set to rise up to 40 per cent 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.”

Mr Thomas said that while repayment increases might put a strain on budgets, the transition into principal and interest loans offers mortgage holders the opportunity to start building equity in their properties.

“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," he said.

“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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