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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