Customers switch mortgage focus

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

Sophie Elsworth

MORTGAGE customers are increasingly turning their backs on interest-only loans and switching to paying down their principal instead.

It comes at a time when home loan interest rates continue to fall – particularly for new customers – giving borrowers the plum opportunity to chip into their debt more quickly.

New figures from AMP Bank showed since the first 2019 rate cut in June, there has been a 14 per cent increase in existing home loan customers proactively switching from interest-only to principal and interest loans.

AMP Bank chief executive Sally Bruce said it was a huge advantage for customers to chip into their principal and help bring down their overall interest charges.

“Actually seeing people who are looking at their interestonly loans and are switching to principal and interest consciously is a really positive trend,” she said.

“The low interest rate environment means than can actually repay faster.”

AMP found for a borrower with a 30year $400,000 mortgage on interest-only for five years and the remaining 25 years was principal and interest, their repayments would climb by $517 per month once they started paying down the principal.

This is based on their interest rate dropping from 4.54 per cent to 4.04 per cent – often 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 moneysaverhq.com.au 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.