UBS says: one in three Aussies don’t understand their interest-only home loan

When you think about the terms and conditions on your mortgage, do you draw a blank? You’re not alone. According to UBS analysts, 1 in 3 Aussies don’t understand their interest-only home loan, unintentionally placing themselves in “substantial” stress once the repayment amount rises. 

If you need a little financial pick me up, interest-only home loans are a type of loan that allow a customer to only pay interest. Generally the maximum term for this is a 5 year period. Once this has passed, you’ll be expected to also start paying the principal and move to a principal and interest loan. 

"We are concerned that it is likely that approximately one third of borrowers who have taken out an interest-only mortgage have little understanding of the product or that their repayments will jump by between 30% and 60% at the end of the interest-only period (depending on the residual term)," said UBS analyst leader, Jonathan Mott. 

RELATED: The number of interest-only home approvals have dropped for the first time since 2009

"While these loans are well secured, we believe many borrowers may face substantial stress as interest rates rise or when they revert to principal and interest,” said Mott. 

For instance, Mozo’s data found that if you take out a interest-only loan for $500,000 to be repaid over 30 years, at a rate of 4.71%, you would have a monthly repayment of $1,962.50 during the interest-only period. However, once this loans switches over to principal and interest, at a rate of 4.41%, your repayment would rise to $2,506.76 - an increase of $544.26. 

As the mortgage confusion continues to grow amongst Aussies, here is a quick crash course in interest-only home loans. 

Who are interest-only loans made for?

Interest-only home loans are more commonly used by investors but are able to be accessed by first home buyers or current homeowners interested in a home loan with a lower repayment. 

What are the pros of interest-only loans?

  • It’s an opportunity to break into the property market 
  • You’ll have lower repayments at the start of the loan 
  • You can use the money saved to pay off other debts 

What are the cons of interest-only loans?

  • If you choose to pay interest-only for 5-10 years, you will be relying on your property’s value to rise. This can be risky if you plan to sell in the future, especially if the market falls back and causes your home to drop in value. 

Is there anything else I should know?

While interest-only home loans are a great way to give yourself some breathing room, they should only be a temporary solution, especially if you’re planning to live in the property for a long time. You’ll also need to be financially prepared for when your repayment increases. 

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