Interest-only loan book jumps to $7 bn

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Investors appear to be taking full advantage of the low interest rate envrionment, with interest only loans sitting at a new high.

Following the Reserve bank’s cut in interest rates last August 2016, the value of interest-only loans had risen to $7bn – accounting for more than one in three new property loans, according to the Australian Securities and Investments Commission.

“We are seeing the re-emergence of interest-only loans despite efforts to slow their use,” said Martin North, principal of financial consultancy firm Digital Finance Analytics.

Last year, banks and regulators have clamped down on interest-only loans amid concerns that they are being recommended to unsuitable borrowers, hence increasing the risk of credit loss in the event of an economic downturn.

According to a new report by ASIC, interest-only loans jumped back to nearly $36 billion after falling by about 16% in the six months to the end of last December.

As much as eight out of 10 brokers were providing written advice on why interest-only loans are suitable for the borrower – a far cry from just three out of 10 last year. However, many of these brokers are just providing general information rather than tailored info on specific products and strategies.

Interest-only loans are attractive for borrowers because of the lower monthly payments and bigger tax deductions. However, problems can arise at the end of the borrowing term when the principal has to be repaid, particularly if house prices fall or rise slowly.

“It is vital brokers understand consumers’ requirement and objectives to ensure they are not placed in unsuitable credit contracts,” said ASIC deputy chairman Peter Kell.

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