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.
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“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.