Interest-only loans are losing some of their shine

Interest-only loans are losing some of their appeal as principal-and-interest loans gain favour in the current lending environment of regulator crackdowns.

The popularity of interest-only loans generally comes through their lower monthly repayments.

This benefit is waning however, as lenders are increasing interest-only rates, lifting minimum deposits and lifting scrutiny levels amid pressure from banking regulators.

At the same time banks are lifting rates for interest-only loans, they are also offering incentives for principal-and-interest loans to make them more attractive to borrowers.

Banks are putting out special offers, loan-switching incentives and offering lower rates on principal-and-interest loans, bringing them front and centre of the mortgage market.’s Bessie Hassan told Australian Financial Review that the attractiveness of principal-and-interest loans was much higher than just 12 months ago.

“Once you find competitive rates it’s almost the same monthly repayment,” she said.

“The added benefit of a principal-and-interest loan is slicing years off the repayment term.”

Lenders are no longer doing anything they can to offer cheaper rates on interest-only loans, and any increases to the official cash rate by the RBA in the future is expected to hit interest-only loans harder than any other.

The current regulatory crackdowns come from concerns that a good proportion of borrowers haven’t built enough of a repayment buffer even though the market sits in an ongoing period of low interest rates.

The Reserve Bank is putting the heat on interest-only loans, fearing they are driving hot demand in Australia’s property hotspots, hurting housing affordability and increasing household debt.

Lenders are being told to keep interest-only loans to 30 per cent or less of their new residential mortgage loans. Conditions are even tougher for these interest-only loans that have small deposits.

In this changing mortgage environment, borrowers need to now carefully look at whether their interest-only mortgage stacks up.

While interest on investment properties are a tax deduction, interest-only loans make it harder to build equity, so borrowers are heavily reliant on a property’s price to rise to improve their position.

The possible choice of principal-and-interest loans is now an important one for borrowers, speak to Perry Finance today to discuss your property lending options.


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