Homeowners turning to interest-only loans presents a "scary" situation

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A Sydney based buyers’ agent has expressed concern about the increasing prevalence of homeowners taking out interest-only loans.

Todd Hunter, founder of buyers’ agency wHeregroup, said the level of homeowners turning to interest only loans is “scary.”

According to a report from the Australian Securities & Investment Commission (ASIC), the value of interest-only home loans issued in Australia increased by 84% from the March 2012 quarter ($18.9 billion) to the March 2015 quarter ($34.8 billion).

Over the same time, the value of principal and interest loans increased by only 20%.

The ASIC report states a record high of 43% of all home loan issued in the December 2014 quarter were interest-only loans.

Of those interest-only loans issued in the December 2014 quarter, the ASIC report shows that 41% were issued to owner occupiers.

While the ASIC report says the motives behind homeowners turning to interest-only loans aren’t clear, Hunter believes they’re relatively obvious.

“It’s stemming from Sydney and Melbourne and the prices that we’re seeing in those two markets right now,” he said.

“It’s just pure desperation on the behalf of people who want to get into those markets right now and they’re using interest-only loans as a way in.”

“It’s scary because people have gone to interest only loans because they can afford to service them over the interest only period, but the repayments are going to skyrocket when that ends.”

Hunter believes those people are banking on price growth in those markets to continue at current levels, which would allow them to sell their home at the end of the interest-only period to cover the principal of their loan.

“It’s very concerning, they’re doing it with no real intention of ever paying the loan off themselves, they’re just hoping they’ll be able to sell at the end of the interest-only period and cover the cost.

“The thing is, if you’re doing that in Sydney or Melbourne right now then there could be trouble, because we’re already seeing those markets come off a bit.

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  • Mum says on 28/08/2015 03:10:57 PM

    Its the only way that the stupid prices can be sustained! Like they say, a FOOL and their money are easily parted!

  • Stefan B says on 04/09/2015 08:45:18 PM

    Lots of new investors in the marketplace too (last 24 months not so much now) who go with the traditional interest only/capital growth equation!

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