Interest-only loans are back

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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

RateCity Staff

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FAQs

Tip: You can use RateCity how much can I borrow calculator to get a quick answer.

How much money you can borrow for a home loan will depend on a number of factors including your employment status, your income (and your partner’s income if you are taking out a joint loan), the size of your deposit, your living expenses and any other debt you might hold, including credit cards.

A good place to start is to work out how much you can afford to make in monthly repayments, factoring in a buffer of at least 2 – 3 per cent to allow for interest rate rises along the way. You’ll also need to factor in additional costs that come with purchasing a property such as stamp duty, legal fees, building inspections, strata or council fees.

If you are planning on renting the property, you can factor in the expected rental income to help offset the mortgage, but again it’s prudent to add a significant buffer to allow for rental management fees, maintenance costs and short periods of no rental income when tenants move out. It’s also wise to factor in changes in personal circumstances – the typical home loan lasts for around 30 years and a lot can happen between now and then.

Interest-only loans are back

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