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

Posted: 26 October 2018 2:10 pm
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.

From 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.

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

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Credit services for Aussie Select, Aussie Activate and Aussie Elevate products are provided by AHL Investments Pty Ltd ACN 105 265 861 (“Aussie”) and its appointed credit representatives, Australian Credit Licence 246786. 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 Activate products is provided by Pepper Finance Corporation Limited ACN 094 317 647 (“Pepper”). Pepper Group Limited ACN 094 317 665, Australian Credit Licence 286655 acts on behalf of Pepper. Credit services for Aussie Elevate products are provided by AHL Investments Pty Ltd ACN 105 265 861 Australian Credit Licence 246786 (“Aussie”) and its appointed credit representatives. Aussie is a trade mark of AHL Investments Pty Ltd ABN 27 105 265 861. Credit and any applicable offset accounts for Aussie Elevate are issued by Bendigo and Adelaide Bank Limited ABN 11 068 049 178 AFSL / Australian Credit Licence 237879.

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% 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
St.George Basic Home Loan - LVR 60% to 80% (Owner Occupier, P&I)
2.64%
2.66%
$0
$0 p.a.
80%
Up to $4,000 refinance cashback.
A competitive variable rate loan from St.George. Refinancers borrowing $250,000 or more can get up $4,000 cashback for their first application (Other terms, conditions and exclusions apply).
UBank UHomeLoan Variable Rate - Discount Offer for Owner Occupiers, Variable P&I Rate
2.49%
2.49%
$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.
Athena Celebrate Home Loan - 60% LVR  Owner Occupier, P&I
2.39%
2.39%
$0
$0 p.a.
60%
A very low variable rate for home buyers with 40% deposits or equity. This rate takes effect from 30 September for new and existing customers. You can get this rate if you apply today.
Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR ≤ 80% (Owner Occupier, P&I)
2.68%
2.69%
$600
$0 p.a.
80%
$2,000 to $3,000 refinance cashback
Get a competitive variable interest rate with no application fee or ongoing fees. Refinance to an eligible Suncorp loan and get a cashback of $2,000 or $3,000, depending on your loan amount. Other conditions apply.
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