Borrowers see interest-only loans in bad light

By Gerv Tacadena

Australian borrowers' negative sentiments over interest-only loans have worsened over the past year.

Australian borrowers' negative sentiments over interest-only loans have worsened over the past year, reflecting the regulatory policy of the Australian Prudential Regulation Authority (APRA), which has put a limit on interest-only lending.

According to the latest Gateway Bank study, the negative sentiment about interest-only loans has risen by 2% year-on-year. Despite this, the number of borrowers who have taken or considered taking on an interest-only home loan increased by 4% this year.

People with interest-only mortgages should be able to come up with strategies to ensure that any shortfall in their budgets would not become critical, according to Gateway Bank CEO Paul Thomas.

Also Read: ​What should you do when the interest-only period ends?

"Mortgage holders currently on interest-only repayments should make financial planning and budgeting a core priority well in advance of the end of their interest-only period," he said.

Early this year, the Reserve Bank of Australia issued a warning that 30% of interest-only mortgages are set to shift to principal-and-interest over the next three years. This translates to $120bn worth of interest-only loans becoming principal-and-interest.

The central bank said the shift would result in roughly 1.5 million borrowers who will be subject to higher monthly repayments.

Thomas said homeowners should not be tempted to extend their interest-only period or refinance to another interest-only loan, as it would only keep them from having financial freedom.

"Repayments could be set to rise up to 40% as loans roll over to principal-and-interest,” he said. “This is a significant surge that will surely hit hard for families’ bottom lines. The earlier you begin to switch to principal-and-interest repayments, the sooner you’ll be able to build up equity on your properties and grow your wealth."

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