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Investors abandon interest-only loans

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Reporter 4 minute read

New APRA data shows that at least half of all new investor borrowers are taking out loans with principal and interest repayments from day one, abandoning the popular interest-only option.

Comparison website RateCity analysed the latest APRA property exposures figures and found that at least 48.5 per cent of investors are paying principal and interest (P&I).

Only 15.71 per cent of loans written in the March quarter were interest-only.

“It’s a shift away from practices at the height of the property boom when desperate borrowers opted for interest-only loans as a way into the market. Those borrowers are now facing a looming credit crunch as their loans reset to principal and interest repayments,” a RateCity spokesperson said.

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Approximately one-third of all mortgages on bank books are still interest-only. RateCity notes that in the next six months, up to $61.1 billion worth of interest-only loans on the books of ADI will expire, with thousands of home owners potentially forced to pay principal and interest. This is based on the assumption that people have taken out five-year interest-only terms.

“By resetting from IO to P&I, most borrowers will benefit from lower rates,” the RateCity spokesperson said.

“This means on average that rates will reset from 5.02 per cent to 4.72 per cent for investors, and from 4.70 per cent to 4.27 per cent for owner-occupiers borrowing $500,000.

“However, by paying principal, repayments on a $500,000 mortgage will increase significantly — $750 a month or $9,000 a year for investors, and $755 a month or $9,060 a year for owner-occupiers.”

APRA’s crackdown has helped to curb IO lending, which fell to a low of $13.6 billion of new housing approvals in March 2018. IO lending peaked at $44 billion in June 2015.

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Investors abandon interest-only loans
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James Mitchell

James Mitchell

James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.

He has a sound pedigree to cover the business of mortgages and the converging financial services sector having reported for leading finance titles InvestorDaily, InvestorWeekly, Accountants Daily, ifa, Mortgage Business, Residential Property Manager, Real Estate Business, SMSF Adviser, Smart Property Investment, and The Adviser.

He has also been published in The Daily Telegraph and contributed online to FST Media and Mergermarket, part of the Financial Times Group.

James holds a BA (Hons) in English Literature and an MA in Journalism.

 

 

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