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Borrowers divided over interest-only home loans

interestrates

interestrates
Reporter 2 minute read

Sentiment regarding the utility of interest-only home loans is split; however, negative sentiment towards interest-only lending is on the rise, according to new research from Gateway Bank.

Research commissioned by customer-owned lender Gateway Bank and conducted by YouGov Galaxy, which involved a survey of 1,001 mortgage holders, has revealed that 50 per cent of Australians hold a positive view of interest-only (IO) home loans, with other half viewing the arrangement negatively.

According to the survey, negative sentiment towards interest-only home loans has risen by 2 per cent year-on-year, which Gateway claimed reflected recent market movements that suggest mortgage holders are slowly moving away from interest-only to principal and interest arrangements.  

Gateway stated that such changes have been driven by the Australian Prudential Regulation Authority’s (APRA) 30 per cent cap on IO ending.

The customer-owned bank also pointed to a statement from the Reserve Bank of Australia (RBA), which noted that $120 billion of interest-only mortgages are due to reach the end of their interest-only period in the next three years.

However, the Gateway research found that despite the rise in negative sentiment, the number of respondents who have used or considered an interest-only home loan increased by 4 per cent year-on-year.

Paul Thomas, CEO at Gateway Bank, urged those on interest-only repayment plans to finalise their financial strategies to ensure that shortfalls in their budget do not become “critical”.

“Mortgage holders currently on interest-only repayments should make financial planning and budgeting a core priority well in advanced of the end of their interest-only period,” he said.

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“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. 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 upcoming increases in repayment obligations. In fact, the earlier the better.”

However, Mr Thomas said while repayment increases following the expiry of the IO period could be a challenge for borrowers, it may also present mortgage holders with an opportunity to begin building equity on their properties.

“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.

He concluded: “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.”

[Related: Borrowers not ‘stress-testing their mortgage]

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