According to an ASIC survey of 11 lenders conducted in 2015, one in every four owner-occupiers and two in every three investors are interest-only.
Reason? Interest-only loans offer certain advantages compared to principal and interest loans, such as lower repayments during the interest-only period and greater tax deductions for investment properties.
Despite these benefits, interest-only loans are not suitable for everyone. For most property buyers, principal and interest loans offer the best value as you pay down some part of the principal with every repayment that you make. An interest-only loan, on the other hand, turns out to be more expensive over its term as no principal is paid down during the interest-only period. Consequently, your repayment amount can increase by up to 30 percent at the end of the interest-only period.
Did you know that the Reserve Bank estimates that around $120 billion a year in loans will be reset between now and 2023?
Interest-only loans generally have an interest-only period of five years. At the end of this period, borrowers can roll it over for another five years or start paying down the principal. However, many borrowers will no longer be able to extend the interest-only period on their loans due to the regulatory restrictions placed by APRA on interest-only loans in 2017.
Interest-only households in Australia can, therefore, expect a jump of $7,000 a year as they transition from interest-only to principal and interest repayments. However, Christopher Kent, RBA assistant governor (financial markets), has expressed confidence in the ability of most households to meet this non-trivial increase. Mr Kent says that many interest-only borrowers will be able to refinance their home loans, and many others would be able to manage the increased repayments through the savings they have accumulated.
Overall, Dr Kent expects the impact on household consumption to be less than moderate. “This is because some interest-only borrowers will be willing and able to refinance their loans. Also, many others have built up a sufficient pool of savings, or will be able to redirect their current flow of savings to meet the payments, or have planned for, and will manage, this change in other ways,” he says.
Re-negotiating your home loan
In the current scenario, as an interest-only borrower, you can try to extend the interest-only period, but that would add to the cost of your mortgage. Alternately, you can switch to a principal and interest loan that would increase the amount of repayments or try to negotiate a better rate with your current lender (or a new one).
“Home borrowers must review their home loans regularly. If you have an interest-only loan, you must check your term expiry and ask your bank what it means in terms of monthly repayments, based on the ongoing interest rates,” says Kate, a mortgage broker.
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Indeed, reviewing your home loan regularly is vital if you want to save money – whether you are an interest-only borrower or a principal and interest borrower. It is also important to understand your home loan product at the outset to prevent mortgage stress in the future.
A mortgage broker can prove to be invaluable on your home loan journey by educating you about the various home loan options available to you. A broker also helps you assess your borrowing capacity so that you only borrow within your means.
In addition to the advisory role they take up, brokers work hard to bring to you the most competitive home loan deals tailored to your situation.
At HashChing, we have created a network of Australia’s ace brokers online. To ensure transparency, each mortgage broker on HashChing must maintain a minimum user rating of 4/5 to continue receiving leads. HashChing broker partners are FREE and you can view their full profile on the platform, complete with a photograph and reviews from real users.
Through our website, you can not only view and compare competitive home loan deals but also find specialist mortgage brokers for your requirement. To get started, post your query online or fill up this contact form so that we can put a mortgage broker in touch with you.
By Vidhu Bajaj,
HashChing Content Writer