New analysis shows lack of understanding on interest-only loans

Do you have an interest-only loan and do you fully understand it and its terms?

Analysis by investment bank UBS has found that around one in three interest-only borrowers might not properly understand their loan and could start to struggle once they start paying back principal.

Generally the borrower of an interest-only loan only pays back the interest part for the first five years then the payments jump as they begin to pay back the principal as well.

The UBS analysis has found a lack of understanding and subsequent budgeting for these loans could lead to financial stress once the repayments spike.

The research surveyed over 900 people this year and found that the number of respondents that said they had an interest-only loan fell way short of economy-wide figures.

Across the economy, around 35 per cent of loans are currently interest-only but of the respondents in the research, only around 24 per cent said they had an interest-only loan.

The lead analyst Jonathon Mott from UBS said when they first saw that discrepancy they thought there was an error in the figures but later realised it was more likely the respondents didn’t properly understand their own loan.

“We are concerned that it is likely that approximately one third of borrowers who have taken out an interest-only mortgage have little understanding of the product or that their repayments will jump by between 30 and 60 per cent at the end of interest-only period,” he told Fairfax Media.

The research comes as interest-only loans are in decline due to banks lifting rates for them as they come under pressure from regulators to restrict their growth.

Talk to Perry Finance today to get a full undertanding of your mortgage options and whether interest-only is right for your property loan.


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