The Reserve Bank of Australia has disclosed that $120bn of interest-only (IO) mortgages will be transferred to principal-and-interest (P&I) loans over the next three years. Given that many borrowers would not qualify to refinance under the stricter lending criteria, many could be forced to pay up to 40% more for their loans.
Regardless of the potential consequences this directive might bring, Australians are not entirely losing their grip on IO mortgages. In fact, a new study from customer-owned Gateway Bank showed a splitting sentiment on the loan type, with 50% of Australians believing that IO home loans are bad, while the other half perceiving them to be good.
The study found that the negative view towards interest-only home loans has increased by 2% year-on-year, echoing recent market movements that imply mortgage holders’ decision to slowly switch from IO to P&I arrangements early.
Gateway Bank said that this reflects the current regulatory environment with the Australian Prudential Regulation Authority (APRA) holding onto its 30% cap on interest-only lending despite lifting benchmarks on investor loans in April.
Paul Thomas, the bank’s CEO, addressed those on interest-only repayment plans and emphasised their need to finalise their financial strategies as soon as possible to minimise shortfalls in their budget.
“The RBA has estimated that for many Aussies, repayments could be set to rise up to 40% 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,” he said.
Earlier this year, RBA also made an announcement on limitations of interest-only lending, in which it estimated that around 30% of all outstanding national mortgage debt will reset from IO to P&I, exponentially hiking the monthly repayments for almost 1.5 million borrowers.
Thomas welcomes the repayment increase, inasmuch as it also presents an opportunity for homeowners 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 said. “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.”
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