Interest-only loans have seen a resurgence, despite questions raised by a regulatory review about their appropriateness for certain borrowers.
The Australian Securities and Investments Commission kicked off the investigation after it discovered only a few lenders kept documentation on how interest-only loans met borrowers’ specific circumstances.
It found while there has been an improvement over the last year, with a 12 per cent decrease in new interest-only loans approved by lenders, some borrowers’ understanding of the risks and benefits of interest-only loans was still lacking.
Interest-only loans see borrowers pay the interest portion only, instead of both interest and principal, for a set period of time. One of the major risks is that the borrower is unable to meet the higher repayments when the interest-only term ends.
Before taking on an interest-only home loan, it’s important to speak to a professional about the pros and cons and whether the loan meets your individual needs.
Interest-only costs (source: MoneySmart)
Assuming a $500,000 loan, with interest rate of 6 per cent:
|Principal and interest||Interest-only for 5 years||Interest-only for 10 years|
|Monthly repayments during interest-only period||$3000||$2500||$2500|
|Monthly repayments during interest-only period||$3000||$3220||$3580|
|Total repayments made||$1,079,000||$1,116,000||$1,159,000|
|Additional interest paid due to the interest-only period||$0||$37,200||$80,500|