Too many “risk flags”? New research finds interest-only borrowers are poor money managers

Ceyda Erem

23 Nov 2017

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Too many “risk flags”? New research finds interest-only borrowers are poor money managers

  • Interest-only borrowers are poor money managers, according to recent analysis from Morgan Stanley

  • Interest-only borrowers are also more likely to fall into debt, despite having an on average 40% lower home loan repayment

It’s been a tough year for interest-only borrowers with APRA’s crackdown on risky lending, but a  recent analysis from Morgan Stanley has found interest-only borrowers guilty of poor money management and a risk to financial institutions.

Reported by Domain, the research found that these borrowers were more likely to fall into debt, give up their savings if they encountered a high cost and sell their property if interest rates rose - making them a higher financial risk.

When it came to keeping higher costs under control, 53% of interest-only borrowers used their plastic or consumer finance, compared to 29% of principal and interest (P+I) borrowers.

RELATED: How I'm Saving $87 a Week (or $4,500 This Year) on My Home Loan

“Interest-only mortgage holders are saving less than P+I customers, with this gap most pronounced for owner occupiers,” said Morgan Stanley analysts.

And although interest-only loans have an on average 40% lower home loan repayment, institutions are continuing to decline applications, bringing the approval rate down from 36% to 30%.

However, given recent statements made by APRA chairman Wayne Byres, this move may still not be enough to amend mortgage risks in the market.

According to Byres, despite the number of institutions turning up the heat on potential first home buyers, there are still fears of banks lending six or more times a borrower's income - potentially adding more fuel to the ‘debt fire’.

“We would like to see the industry devote more effort to the collection of realistic living expense estimates from borrowers and give greater thought to the appropriate use and construct of benchmarks in instances where those estimates are deemed insufficient,” he said.

But Mozo’s Property Expert, Steve Jovcevski, worries that with the bank’s tighter lending criteria, interest-only borrowers could eventually find themselves in hot water.

“Borrowers who took out an interest-only loan five years ago during the property boom are now finding they can’t rollover their loan because of the change in criteria. So if they do transition over to a P+I loan, they’ll have higher repayments at around 40% higher than the I/O payment, which could result in them having to sell or refinance,” says Jovcevski.

If it’s been a while since you last looked at your home loan, there’s a good chance of a more competitive and flexible option out there. Here’s a quick look at a few refinance loan options below, or check out our home loan comparison tool for other options.  

Refinance loan options - rates updated daily

  • Promoted

    Athena

    2.84% p.a.

    2.80% p.a.

    $1234

    Product details Close details
    Variable Home Loan

    Get the low rate you deserve with Athena, one of Australia's newest direct lenders. No fees and fee-free redraw. The same low rates for new and existing customers. Score loyalty bonus for making repayments. Min 20% deposit.

    • $0.00

    • $0.00

    • yes - free

    • yes - free

    • no

    • 2.84% p.a.

    • 2.80% p.a.

    • $0

    • 80.00%

    • $100,000

    • $2,000,000

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

    Read our Mozo Review to learn more about the Variable Home Loan

  • Promoted

    UBank

    2.84% p.a.

    2.84% p.a.

    $1234

    Product details Close details
    UHomeLoan - Discount Offer

    Free redraw with flexible repayments. Min 20% deposit. Winner of a Mozo Experts Choice Award 2019 in the Low Cost Home Loan category^.

    • $0.00

    • $0.00

    • yes - free

    • yes - free

    • no

    • 2.84% p.a.

    • 2.84% p.a.

    • $0

    • 80.00%

    • $200,000

    • -

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

    Read our Mozo Review to learn more about the UHomeLoan - Discount Offer

  • Promoted

    Easy Street

    2.95% p.a.

    2.99% p.a.

    $1234

    Product details Close details
    Standard Variable Home Loan - New Money Offer

    100% offset account. $0 monthly fees, $0 annual fees and free redraw. Borrow up to 95% of the property value with Lenders Mortgage Insurance.

    • $0.00

    • $300.00

    • yes - free

    • yes-free

    • yes

    • 2.95% p.a.

    • 2.99% p.a.

    • $500

    • 95.00%

    • $50,000

    • -

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

    Read our Mozo Review to learn more about the Standard Variable Home Loan - New Money Offer

  • Promoted

    loans.com.au

    2.88% p.a.

    2.90% p.a.

    $1234

    Product details Close details
    Smart Home Loan

    A low-rate home loan that could save you thousands. No application or ongoing fees. Unlimited additional repayments. Unlimited free redraws with no minimum redraw amount, Limited time only.

    • $0.00

    • $0.00

    • yes - free

    • yes - free

    • no

    • 2.88% p.a.

    • 2.90% p.a.

    • $520

    • 80.00%

    • $50,000

    • $1,000,000

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

    Read our Mozo Review to learn more about the Smart Home Loan

  • Promoted

    Newcastle Permanent

    3.19% p.a.

    3.23% p.a.

    $1234

    Product details Close details
    Special Real Deal Home Loan

    Free extra repayments. No application or service fees. Only 10% deposit needed. Winner of a Mozo Experts Choice Award 2019 for the First Home Buyer Loan and Investor Home Loan categories.^

    • $0.00

    • $0.00

    • yes - free

    • yes - fees apply

    • yes - partial only

    • 3.19% p.a.

    • 3.23% p.a.

    • $0

    • 90.00%

    • $150,000

    • -

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

    Read our Mozo Review to learn more about the Special Real Deal Home Loan

*WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for the amount and term you entered.

**Initial monthly repayment figures are estimates only, based on the advertised rate, and a loan of $500,000 repaid over 25 years. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

Things to consider when taking out a home loan 

Repayment facilities - Life is full of unpredictable events, so it’s a good to idea to have the repayment flexibility when you need it. For instance, a redraw facility allows you to withdraw any extra repayments you’ve made in the past, while a repayment holiday gives you a repayment break for a short period of time - but this does extend the lifespan of your home loan.

Fees - While you can’t escape the initial application fee, ongoing service can cost you thousands over the course of your loan. So unless you’re planning on reaping the benefits of your loan’s repayment features, you may be better off sticking to a loan with no ongoing service fees.

The interest rate - Each interest rate - variable, fixed or split - offer different features. For example, a variable rate will change over time but usually has a lower interest rate and offers repayment features, whereas a fixed rate will remain the same for a set period of time but has less features.

Mozo may receive advertising fees from the financial institutions, issuers of financial or credit products and third party advice providers that are shown on this page. These fees are based on a cost per click, cost per acquisition, or a fixed fee.