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Interest-only loans are back
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 |
Disclaimer
This article is over two years old, last updated on September 15, 2016. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.
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Product database updated 05 Nov, 2024
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