AMP launches 10-year interest-only loan: 'Giving the people what they want'

Unconventional financing solutions appear to be growing in popularity among homebuyers and investors, but the likes of AMP's new 10-year interest-only mortgage won't be for everyone. 

The long-term interest-only option launched on Monday and is particularly marketed to retirees and pre-retirees looking to maximise cashflow.

"In the past 20 years, the number of Australians aged 55 to 64 who own their homes outright has significantly decreased," AMP director of lending and everyday banking Michael Christofides said.

"Consequently, more people are carrying debt into retirement – a trend set to continue."

^{Image: Michael Christofides, courtesy of AMP}

He noted that, for many retirees or those nearing retirement, flexible cashflow and unlocked equity is more beneficial than repaying their mortgage.

"Especially in the early years of retirement when many underspend out of fear of outliving their savings," he said.

The 10-year interest-only option will likely also catch the eye of investors looking to build a portfolio fast and owner-occupiers seeking more affordable repayments.

Features of the new long-term interest-only option include:

• 10-year interest-only term without reassessment
• Available to owner-occupiers and investors
• Maximum loan-to-value ratio (LVR) of 80% (capped at 70% for some owner-occupiers)
• Available on AMP's variable and fixed-rate professional package home loan products

While many lenders offer interest-only terms of up to five years for owner-occupiers and 10 years for investors, AMP's point of difference is allowing borrowers to skip the typical mid-term reassessment.

The growing appeal of longer-term and flexible loans may also reflect deeper demographic shifts, investor, buyer's agent, and founder of Palise Property, Steve Palise, told YourMortgage.com.au.

He noted the rise of extended loan terms – like 40-year mortgages – could point to longer working lives.

^{Image: Steve Palise}

"In the past people would retire at 55 to 60 years of age, now the general retirement age is 65 to 70," he said.

That sees today's homebuyers potentially able to repay their mortgage for longer than previous generations, though homeownership is decreasing among younger Australians.

AMP points to its new offering as a potential stepping stone into the property market.

However, Joseph Daoud, economist and founder of mortgage brokerage Its Simple Finance, warns against viewing this loan as a fast-track into homeownership.

^{Image: Joseph Daoud}

"A 10-year interest-only period doesn't actually get you into the market faster, because your principal and interest repayments are calculated based on the 20 years remaining to repay the loan," he told YourMortgage.com.au.

This will likely result in increased monthly repayments after the interest-only term.

According to Mr Daoud, these types of products are better suited to sophisticated investors banking on capital growth or self-employed borrowers aiming for maximum tax deductibility.

"If you've never bought a property before or have never invested, a 10-year interest-only loan could be disastrous for your money management," he adds.

"AMP has really gone the distance to get this new product through, and we believe they offer a unique loan product catered to investors."

Buyers lean into creative financing strategies to purchase property

Mr Palise has observed a growing trend of buyers leaning into non-traditional loans and investing strategies to overcome affordability pressures.

"[AMP are] giving the people what they want," he told YourMortgage.com.au.

"Obviously, with median house prices in Sydney, for instance, being more than $1.3 million, people can't afford to do principal and interest."

Alongside a rise in once-unconventional financing methods, such as 100% or 95% LVR home loans and guarantors, Mr Palise has noticed an increase in creative purchasing tactics.

"There are more rentvesters now than they've ever been," he said.

"And, because of a lack of rental yields on properties due to high interest rates, if investors want to keep buying property, they have to think outside the box.

"So, they're buying different styles of property – instead of buying houses, they're buying apartments or townhouses, moving to more regional areas and becoming borderless investors.

"And a big one is actually commercial property – a lot of investors are shifting towards that because it is a different form of lending … the banks will treat that property in isolation [when conducting serviceability testing]."

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^{Image by Alexander Lunyov on Unsplash}