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 |
