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
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