Interest only mortgages put big banks at risk

While interest only home loans are a popular choice for investors, financial research company Fitch Ratings has said that investor and interest only loans pose a considerable risk for banks, as they weaken mortgage books.

Senior director at Fitch, Tim Roche explained that interest only home loans put the banks under risk in a downturn, as they are not getting any of their principal back from the borrower.

Roche also indicated concern about high household debt levels as a “proportion of disposable income was flat from 2006 to 2013 but it has been going up over the past couple of years."

46.3% of big four bank Westpac’s mortgage portfolio is made up of property investor borrowers. However, it seems the major bank isn’t worried with Westpac chief financial officer, Peter King explaining that when interest-only loan applicants were assessed for loan serviceability the loans were treated as if they were principal and interest loans.

When you consider 73% of Westpac's customers are ahead on their home loan repayments and 23% of those more than two years ahead, it’s no surprise Westpac is sitting so comfortably.

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*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.

**Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. 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.

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