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

Ceyda Erem

23 Nov 2017

Interest only loans content

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. Advertiser disclosure.

  • loans.com.au
    Mozo Expert Choice Badge" style="width:60px;">

    1.85% p.a.variable for 24 months and then 2.25% p.a.

    2.21% p.a.

    $1234

    Product details Close details
    Smart Booster Home Loan

    2 Year Discounted Variable Rate, Owner Occupier, Principal & Interest, <80% LVR

    1.85% p.a.variable for 24 months and then 2.25% p.a.

    2.21% p.a.

    New super low introductory rate home loan for two years. Min 20% deposit. No monthly or ongoing fees. Fast settlement times. Mozo award-winning online lender. Friendly, local Australian based team.

    Smart Booster Home Loan

    New super low introductory rate home loan for two years. Min 20% deposit. No monthly or ongoing fees. Fast settlement times. Mozo award-winning online lender. Friendly, local Australian based team.

    • $0.00

    • $0.00

    • yes - free

    • yes - free

    • Optional - with 0.10% additional interest

    • $520

    • 1.85% p.a.variable for 24 months and then 2.25% p.a.

    • 2.21% 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 Booster Home Loan

    Details Close

  • Athena
    Mozo Expert Choice Badge" style="width:60px;">

    1.99% p.a.

    1.99% p.a.

    $1234

    Product details Close details
    Celebrate Variable Home Loan

    <60% LVR, Owner Occupier, Principal & Interest

    1.99% p.a.

    1.99% p.a.

    Fast and efficient online application. Automatic discounts as loan is paid down. Free extra repayments and redraw facility. Zero fees. Min 40% deposit required. Winner of three Mozo Expert's Choice Awards for 2021.

    Celebrate Variable Home Loan

    Fast and efficient online application. Automatic discounts as loan is paid down. Free extra repayments and redraw facility. Zero fees. Min 40% deposit required. Winner of three Mozo Expert's Choice Awards for 2021.

    • $0.00

    • $0.00

    • yes - free

    • yes - free

    • no

    • $0

    • 1.99% p.a.

    • 1.99% p.a.

    • $0

    • 60.00%

    • $100,000

    • $2,000,000

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

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

    Details Close

  • HSBC

    p.a.

    2.87% p.a.

    $1234

    Product details Close details
    Fixed Rate Home Loan Home Loan Package

    Owner Occupier, Principal & Interest, LVR <80%

    p.a.

    2.87% p.a.

    Ability to split your home loan between Fixed and Variable. Dedicated Relationship Manager. Min 20% deposit. Refinancers borrowing $250,000 or more could receive $3,288 cashback (T&Cs, eligibility and lending criteria apply).

    Fixed Rate Home Loan Home Loan Package

    Ability to split your home loan between Fixed and Variable. Dedicated Relationship Manager. Min 20% deposit. Refinancers borrowing $250,000 or more could receive $3,288 cashback (T&Cs, eligibility and lending criteria apply).

    • $390.00 yearly

    • $300.00

    • yes - free up to $10,000 p.a.

    • no

    • no

    • $270

    • p.a.

    • 2.87% p.a.

    • $270

    • 80.00%

    • $500,000

    • $7,500,000

    • Fixed

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

    • Receive $3,288 cashback when you refinance an existing home loan of $250,000. Must apply by 31 December 2021 and settle by 28 February 2022.

    Read our Mozo Review to learn more about the Fixed Rate Home Loan

    Details Close

  • Macquarie

    p.a.

    2.19% p.a.

    $1234

    Product details Close details
    Basic Home Loan

    Fixed, Owner Occupier, Principal & Interest, LVR<70%

    p.a.

    2.19% p.a.

    No upfront or ongoing fees. Free extra repayments and redraw facility. Option to earn Qantas points. Min 30% deposit required. Borrow up to $750,000.

    Basic Home Loan

    No upfront or ongoing fees. Free extra repayments and redraw facility. Option to earn Qantas points. Min 30% deposit required. Borrow up to $750,000.

    • $0.00

    • $400.00

    • yes - free

    • yes - free

    • no

    • $0

    • p.a.

    • 2.19% p.a.

    • $0

    • 70.00%

    • $150,000

    • $750,000

    • Fixed

    • Principal & Interest

    • Owner Occupier

    • Monthly

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

    Details Close

  • Yard
    Mozo Expert Choice Badge" style="width:60px;">

    1.99% p.a.

    2.02% p.a.

    $1234

    Product details Close details
    Variable Home Loan Special

    Owner Occupier, Principal & Interest, LVR <70%

    1.99% p.a.

    2.02% p.a.

    Special rate applies to home loan applications submitted by 31 October 2021. Unlimited additional repayments, free redraw, 100% offset account. 30% deposit required. Simple online application. Low Cost Home Loan winner in the Mozo Expert's Choice Awards for 2021.

    Variable Home Loan Special

    Special rate applies to home loan applications submitted by 31 October 2021. Unlimited additional repayments, free redraw, 100% offset account. 30% deposit required. Simple online application. Low Cost Home Loan winner in the Mozo Expert's Choice Awards for 2021.

    • $0.00

    • $500.00

    • yes - free

    • yes - free

    • Optional - $10 per month

    • $530

    • 1.99% p.a.

    • 2.02% p.a.

    • $530

    • 70.00%

    • $150,000

    • $5,000,000

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

    • Special rate applies to home loan applications submitted by 31 October 2021.

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

    Details Close

^See information about the Mozo Experts Choice Home loans Awards

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.