News

Borrowers face extra repayments as interest-only loans rollover to principal-and-interest

29 November 2018

There’s a huge number of interest-only mortgages in Australia – around $120 billion worth – that will soon transfer over to principal-and-interest according to the Reserve Bank.

The RBA says over the next three years, as these mortgages make the transition, many borrowers would not qualify to refinance under today’s stricter lending criteria.

For those borrowers unable to refinance, many could end up paying up to 40 per cent more for their loans.

A new Gateway Bank study has shown that while sentiments on interest-only loans are divided fairly evenly, negative views on them have increased 2 per cent year-on-year, reflecting the tightened regulatory environment and the Australian Prudential Regulation Authority (APRA) maintaining its 30 per cent cap on interest-only lending.

Gateway Bank CEO Paul Thomas says those on interest-only repayment plans need to look at finalising their strategies as soon as possible.

“The RBA has estimated that for many Aussies, repayments could be set to rise up to 40 per cent as loans roll over to principal-and-interest,” he told Your Investment Property.

“This is a significant surge that will surely hit hard for families’ bottom lines, so it’s never too early to start planning for the for the upcoming increases in repayment obligations.”

“In fact, the earlier the better,” he said.

The RBA have previously announced limitations on interest-only lending, and estimated around 30 per cent of outstanding national mortgage debt will reset from interest-only to principal-and-interest, meaning around 1.5 million borrowers would face higher repayments.

“The affordability of an interest-only home loan may be appealing, but Aussies should avoid the trap of extending their interest-only period or refinancing to another interest-only loan, as it will distance them further from financial freedom,” Mr Thomas said.

“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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