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IO borrowers could struggle to refinance, warns industry

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Lucy Dean 4 minute read

Interest-only borrowers may have difficulty refinancing, following a crackdown from the Australian Prudential Regulation Authority on interest-only loans, new research has found.

The monthly finder.com.au survey on the Reserve Bank of Australia’s (RBA) next interest rate move also asked the 33 respondents (largely analysts and economists from lenders and research companies) about their thoughts on APRA’s measures to curb interest-only lending.

According to the survey, more than half (57 per cent) of panelists forecast that interest-only (IO) borrowers would have trouble refinancing.

Specifically, the respondents said they believed borrowers switching from IO to principal and interest, or those whose fixed IO terms are nearing expiring, would find it difficult to refinance.

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Graham Cooke, insights analyst at finder.com.au, added that as future rate hikes become a growing possibility, customers with IO could be the worst hit. He commented: “Borrowers shifting from an interest-only loan to a principal and interest loan may be struck with a higher repayment initially, and they may find it difficult to service the principal portion, but ultimately it’s important to pay down the principal of the loan.

“With the next rate move likely to be in a positive direction, and with many lenders already lifting product rates, IO mortgage holders will be the most directly affected,” he said.

He added that interest rates would likely rise as a result of the crackdown, making IO loans more expensive.

As an example, the comparison website outlined that those with an $800,000 IO loan with 4 per cent interest could have repayments of around $2,667 (compared to $3,819 for P&I), but an increase in interest to 6 per cent would see the IO repayments rise by $1,333 per month – while P&I repayments would rise by $997.

The majority of panelists, 74 per cent, predict the next RBA rate rise to come in 2018. “We’re looking at a higher-interest future,” Mr Cooke said.

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“IO investors are reliant on prices continuously going up, but we’re starting to see prices either slow or fall in some cities across the country,” he added, advising IO borrowers to “ensure” they have a 2-3 per cent buffer in place to protect against rate rises.

According to the latest CoreLogic figures, IO loans made up 36.9 per cent ($141.6 billion) of new loans in the year ending 31 March 2017, a drop of 3.6 per cent, or $5.3 billion, from the year ending 31 March 2016.  

[Related: Brokers slam APRA’s ‘sledgehammer’ approach to IO loans]

IO borrowers could struggle to refinance, warns industry
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