Interest-only home loan blow looms

MANY borrowers face a home loan disaster as they are forced to switch from interest-only deals to principal and interest repayments, alarming new figures reveal.

This could jack up owneroccupier customers’ repayments on a $500,000 loan by almost $300 per month, while investors could be slugged an additional $380 per month.

Findings from online mortgage broker Lendi also show 30 per cent of homeowners do not know interest-only home loan rates are usually higher than principal and interest deals.

Reserve Bank of Australia figures outlined about $120 billion of interest-only loans are scheduled to roll over to principal and interest loans each year over the next three years.

Unless specially negotiated, most interest-only loans have a five-year expiry period.

Lendi’s co-founder David Hyman said borrowers on interest-only deals should be paying close attention to their repayments.

“There’s now a significant price difference between a principal and interest loan and interest-only loans,” Mr Hyman warned.

At their peak in 2015, interest-only loans accounted for 40 per cent of all mortgages but the financial regulator, the Australian Prudential and Regulation Authority, has since tightened standards on interest-only lending.

Banks were forced to limit new interest-only loans to no more than 30 per cent of new mortgages.

Interest-only lending is popular among investors to allow bigger cashflow and maximise tax benefits on property investments.

On a $500,000, 30-year owner-occupier interest-only loan a customer paying the average variable rate of 4.75 per cent would see their monthly repayments jump from $1979 to $2270. This is after a fiveyear interest-only period ends.

On the same loan for investors, monthly repayments would jump from $1979 to $2355 once they switch to principal and interest repayments.

The research also found of interest-only customers 39 per cent do not know when their interest-only period ends.

Home Loan Experts managing director Otto Dargan said the looming end to the interest-only period could see some investors forced to sell.

“Borrowers need to be cautious with interest-only loans and check that they can afford the repayments if the loan switches to principal and interest later on,” he said.

“The tax and cashflow benefits are usually not worth the higher rate and risk for most borrowers.”

Mr Hyman said that in the past three months only 6 per cent of the loans he has settled were interest-only.