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

  • UBank

    3.59% p.a.

    3.59% p.a.

    $1234

    Product details Close details
    UHomeLoan - Discount Offer

    A low rate Home Loan with no bank fees on variable rate loans. Easy & fast to apply. Choose between flexible repayments and make extra repayments for free on a variable rate home loan.

    • $0.00

    • $0.00

    • yes - free

    • yes

    • no

    • 3.59% p.a.

    • 3.59% p.a.

    • $0

    • 80.00%

    • $200,000

    • $699,999

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

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

  • HSBC

    3.59% p.a.

    3.61% p.a.

    $1234

    Product details Close details
    Discounted Home Value Loan

    Discounted rate for the life of the loan. A relationship manager to help you through the application process.

    • $0.00

    • $300.00

    • yes - free

    • yes - free online

    • no

    • 3.59% p.a.

    • 3.61% p.a.

    • $150

    • 90.00%

    • $50,000

    • $7,500,000

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

    Read our Mozo Review to learn more about the Discounted Home Value Loan

  • loans.com.au

    4.29% p.a.

    4.31% p.a.

    $1234

    Product details Close details
    Essentials Variable 80

    No monthly or ongoing fees. Unlimited additional repayments.

    • $0.00

    • $0.00

    • yes - free

    • yes - free

    • no

    • 4.29% p.a.

    • 4.31% p.a.

    • $520

    • 80.00%

    • $50,000

    • $2,000,000

    • Variable

    • Principal & Interest

    • Investor

    • Weekly, Fortnightly, Monthly

    Read our Mozo Review to learn more about the Essentials Variable 80

  • ME

    3.97% p.a.

    3.99% p.a.

    $1234

    Product details Close details
    Basic Home Loan

    No fees to redraw & low variable rate. Meet a mobile banker at a time or place that suits you.

    • $0.00

    • $350.00

    • yes - free

    • yes - free

    • no

    • 3.97% p.a.

    • 3.99% p.a.

    • $400

    • 80.00%

    • $40,000

    • -

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

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

  • Gateway Bank

    3.64% p.a.

    3.66% p.a.

    $1234

    Product details Close details
    Low Rate Essentials Home Loan

    A great low variable rate with no annual fees & make extra repayments without any penalties.

    • $0.00

    • $300.00

    • yes - free

    • yes - free

    • no

    • 3.64% p.a.

    • 3.66% p.a.

    • $275

    • 80.00%

    • $50,000

    • $2,000,000

    • Variable

    • Principal & Interest

    • Owner Occupier

    • Weekly, Fortnightly, Monthly

    Read our Mozo Review to learn more about the Low Rate Essentials 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 $150,000 over 25 years.

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.