Customers switch mortgage focus

People are steering clear of interestonly loans to pay off housing debt quicker, writes Sophie Elsworth

principal and interest loans have cheaper rates. They would also save about $14,700 over the life of their loan, it found. The Reserve Bank of Australia has cut its official cash rate twice this year and it now sits at a record low of 1 per cent. In recent years the banking regulator, the Australian Prudential and Regulation Authority, clamped down on interest-only loans, forcing lenders to reduce this type of borrowing to 30 per cent of new loans. However, this measure was removed last year after serving its purpose to slow down riskier lending. In most cases, a customer just needs to phone their bank to request switching their loan repayments to principal and interest. Rising Tide Financial Services’ director Matt Hale said therek was now a “bigger

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carrot” for customers to move across to principal and interest repayments.

“The rates for principal and interest versus interest-only are more appetising than they were previously,” he said.

“The biggest issue people have to moving across is their minimum monthly repayment does increase.”

Heritage Bank data shows interest-only loans now make up 12.6 per cent of its total customer borrowings, down from 15.3 per cent a year ago.

Mr Hale said it was a worry if borrowers struggled to comfortably meet principal and interest repayments now while rates sat at rock-bottom levels.

“If you can’t pay down the principal now I’m not really sure how you are ever going to be able to pay it down,” he said.

“There might be some small rate drops now but we are predominantly at the bottom.”

Mr Hale also said paying off the principal was a great way to have “forced savings” instead of having a mortgage offset account that was tempting to dip into.