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Consumers considering an interest-only mortgage have been reminded by the Australian Securities and Investment Commission (ASIC) to make sure the arrangement suits their borrowing needs and capabilities.

“For most Australians, a mortgage is one of the most significant financial decisions they will make in their lives,” ASIC deputy chairman Peter Kell said.

“While an interest-only mortgage may be attractive due to their initial lower repayments, they generally cost more in the long run.  Some lenders have also started charging higher interest rates on interest-only mortgages compared to principal and interest mortgages,” Kell said.

“Anyone thinking of taking out an interest-only mortgage needs to have a clear plan of action when the interest-only period ends to ensure they can afford the repayments, which may increase significantly.”

According to ASIC, a $500,000 mortgage with an interest rate of 6% being paid off over 30 years would cost a borrower an extra $37,219 over the life of the loan if it included a five-year interest-only period.

A 10-year interst-only period on the same loan would see the borrower repay an additional $80,446 over the life of the loan.

For people considering an interest-only mortgage, Kell said they needed to be mindful of the fact that repayments would increase after the end of the interest-only period and that the principal of the loan will not reduce while interest-only repayments are being made.

 

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