Interest only mortgage shock: 900,000 borrowers to be hit with much higher home loan repayments

Richard Whitten 26 October 2018 NEWS

Woman sitting at table looking stressed.

When the interest only period on a mortgage ends your monthly repayments will jump up – get prepared or refinance to a lower rate.

A few years ago many Australians took out interest only mortgages so they could buy homes and investment properties while making smaller repayments.

In 2019, almost a million of these mortgages will become much more expensive to repay as the interest only periods come to an end.

Finder's analysis of ABS housing finance data suggests that the jump from interest only to principal and interest repayments could add an extra $400 a month to people's repayments.

At a time when rates are rising and property prices are falling, this could be a nightmare scenario. Borrowers will need to budget for higher payments and start comparing their options so they can refinance to principal and interest loans with lower rates.

Compare and refinance today

Rates last updated November 14th, 2018
$
% p.a.
Offset account
Split account
Loan type
Your filter criteria do not match any product
Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Maximum Insured LVR Amount Saved Short Description
3.59%
3.59%
$0
$0 p.a.
80%
Enjoy flexible repayments, a redraw facility and the ability to split your loan. Plus, pay no application or ongoing fees.
3.59%
3.61%
$0
$0 p.a.
90%
Get a low interest rate loan with no ongoing fees. Plus you can make extra repayments and free redraw online. Available with just a 10% deposit.
3.64%
3.66%
$0
$0 p.a.
80%
A simple mortgage with a competitive interest rate and no application or monthly fees. Borrow up to $2000000 from a convenient online lender.
3.57%
3.58%
$0
$0 p.a.
80%
Get a very low interest rate and avoid big fees. Apply online for full approval in under 30 minutes and add a 100% offset account for $10 a month.

Compare up to 4 providers

Aussie Home Loans Logo

Enter your details below to receive an obligation-free quote from an Aussie home loans expert today

By submitting this form, you agree to the Finder Privacy and Cookies Policy and Terms of Use

Applications are subject to approval. Conditions, fees and charges apply. Please note that you need to be an Australian citizen or permanent resident to apply.

Credit services for Aussie Select, Aussie IQ and Aussie Optimizer products are provided by AHL Investments Pty Ltd ACN 105 265 861 Australian Credit Licence 246786 ("Aussie"), and its appointed credit representatives. Credit for Aussie Select products is provided by Residential Mortgage Group Pty Ltd ACN 152 378 133 Australian Credit Licence 414133 (“RMG”). RMG is a wholly-owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian Credit Licence 234945. Credit for Aussie Optimizer products is provided by Perpetual Limited ABN 86 000 431 827 (Lender). Credit for Aussie IQ is provided by Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502. Home loans issued by the Lender are serviced by Macquarie Securitisation Limited ABN 16 003 297 336, Australian Credit Licence 237863 (MSL).

Aussie is a trade mark of AHL Investments Pty Ltd. Aussie is a subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124. ©2018 AHL Investments Pty Ltd ABN 27 105 265 861 Australian Credit Licence 246786.

By submitting this form, you agree to the finder.com.au Privacy and Cookies Policy, Terms of Use, Disclaimer & Privacy Policy and the Aussie privacy policy.

Aussie Home Loans is both a lender and a mortgage broker, and offers a range of services.

  • FREE Suburb and Property Report with every appointment.
  • Access 3,000+ loans from over 20 lenders.
  • Get expert help with your loan application, including paperwork and eligibility.
  • Over 1000 brokers who are able to help you in your local area.

Aussie Home Loans Lender Logos

The Adviser’s number 1 placed mortgage broker 5 years running (2013-2017)

So what's the big deal about interest-only loans?

In 2014-2015, the Australian property market was booming, and interest only loans made up 42% of new lending.

This type of mortgage keeps your repayments low for the first few years as you only pay the interest. But when these products revert to principal and interest payments borrowers have to pay back a lot more.

It's a short-term strategy for the right buyer, but you end up paying more in the long run. And if you don't watch your loan closely the jump in repayments can really hurt you.

Let's say you borrowed $400,000 on a 30-year loan with interest-only repayments and a rate of 4.14%.

Your monthly repayments would be just $1,380 (during the interest only period).

But once that period ends your principal and interest payments would rise to $1,942 a month. That's $562 extra a month.

For some people, this is more than they can afford to repay.

I'm worried this might affect me: what should I do?

There are a few steps you can take if you're worried about your mortgage:

  1. Take a look at your home loan right now. Check if you're making principal and interest repayments. Check your interest rate and see how competitive it is.
  2. Work out when your interest only period ends and how much extra it will cost you. Talk to your lender about extending the interest only period if you're worried about higher repayments.
  3. Budget, budget, budget. Once you know how much extra you'll be paying, see if you can squeeze the difference out of your current spending by cutting your costs.
  4. Refinance to a cheaper loan. Interest only loans tend to have higher rates. Switching to a lower principal and interest rate may still cost you more per month, but the rate will be more competitive, you'll actually be paying off your whole loan (rather than just the interest) and you won't have to worry about the sudden shock of principal and interest repayments kicking in.

If you still feel overwhelmed, a mortgage broker can provide free advice on finding a new loan and refinancing. And if you think you're really going to struggle but refinancing isn't an option, talk to your lender about their hardship assistance program and anything else they can do to help.

Need mortgage help? Speak to a broker

Image: Shutterstock

Get more from finder

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy.
Ask a question
Go to site