Interest-only loans have dropped by nearly half, but it might not be all APRA’s doing

Thursday 07 December 2017

Article by Ceyda Erem

In just three months since APRA pushed for tougher lending criteria, interest-only home loans have now dropped to a historic low of 16.9% of new lending, from 30.5% in June.

Interest-only loans have dropped by nearly half, but it might not be all APRA’s doing

Earlier this year, APRA urged banks to minimise ‘risky’ lending through a tougher lending criteria and to keep interest-only lending under a 30% cap.  

In addition to this percentage sitting well below APRA’s 30% recommendation, the big four banks’ share of interest-only loans has also dropped from 48.7% to a mere 16.7%.

However, APRA’s crackdown on risky lending may not be the only reason for the sudden drop in interest-only loans.

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

According to Gateway Credit Union’s Mortgage Holders Sentiment Report, 46% of Aussies identify themselves as ‘Adamant Decliners’ of interest-only loans, meaning they would not use an interest-only loan.

This was mainly due to the fact that they felt that interest-only loans would increase debt.

“It’s encouraging to see so many Australians are wary of the dangers around interest-only home loans. While they do serve a purpose for some borrowers, the reality is for many that interest-only home loan can create a precarious situation. Especially if borrowers enter the loan without considering if they can service it once the interest-only period ends,” said Gateway CEO, Paul Thomas.  

The report also found that just 18% of Aussies claimed to be ‘Enthusiastic Users’ of the loan, believing it increased cash flow, 25% were ‘Resistant Approvers’, acknowledging the benefit of an interest-only loan, but refusing to use it and 11% described themselves as ‘Hesitant Compilers’ - Aussies who acknowledged that the loan was ‘bad’, but use it regardless.

RELATED: RBA interest rates to stay at 1.50% over Christmas

And in the generational war, Baby Boomers were more likely to be ‘Adamant Decliners’ with Gen Y as the ‘Enthusiastic User’.

“When it comes to the different generations, it makes sense that younger cohorts are more accepting of interest-only home loans. Many younger Australians are finding it difficult to break into the property market,” Thomas explained.

And while it looks like Aussies are on the fence with how they feel about interest-only loans, we thought it might be time for a good old pros versus cons list when it comes to taking out an interest-only loan.

Pros of an interest-only loan

Lower monthly repayment - As you will be paying interest-only, your monthly repayment will be much lower than a principal + interest loan. This is the biggest reason many Aussies choose to take out an interest-only loan.

More financial freedom - When your repayments are lower, you’ll have more freedom to invest your money elsewhere - a positive for Aussie investors.

Cons of an interest-only loan

Extending the life of your loan - Because at the end of the day, you will have to pay off your loan eventually and once your loan rolls over to principal + interest, you may find it difficult to keep up with your repayments.

Your property's value may drop - As you aren’t repaying any of the principal on your property, this may cause your home to depreciate in value. This could also mean that you’ll end up owing more than the property’s true worth.

If it’s been awhile since you last compared home loans, there’s a good chance of a better offer currently in the market. You can check out Mozo’s home loan comparison tool to weigh up your refinance options.

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