A new report from global investment bank UBS noted that up to a third of home loan borrowers may not realise they’re on interest-only loans, and confusion around the types of loans borrowers have taken out has begun to emerge.
Because monthly repayments on interest-only loans (which do not require payment on the loan principal for roughly five years) jump by about 50% at the end of the interest-only period, it’s possible that these findings – generated from a survey of more than 900 borrowers – suggest many homeowners don’t realise they’re positioning themselves for financial stress.
A survey from ME Bank revealed that 38% of respondents have no understanding of interest-only mortgages.
While a large segment of borrowers may not understand their loan type, the banking sector is just as confused about their own customers. Since mid-2015, after the banks began adjusting their interest rates for property investors to comply with the Australian Prudential Regulation Authority’s (APRA) new limits on investor borrowers, nearly $60bn worth of loans have been reclassified from investor to owner-occupier mortgages.
The Australian Prudential Regulation Authority (APRA) earlier this year launched new limits on interest-only lending, capping the amount of new interest-only loans the banks could write at 30 per cent. At the time, around 45 per cent of loans being sold were interest-only — far higher than anywhere else in the developed world.
Since the rules were introduced, the banking sector has rammed through sharp interest rate hikes for investors and interest-only loans to dampen enthusiasm for the products. Rates have risen in some instances by around 1 per cent.
Rates for interest-only loans, in response to APRA’s latest curbs, have been lifted by 46 and 76 basis points for owner-occupiers and property investors respectively.
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