New 10-year interest only home loan highlights borrowers’ pain

Home loans with longer interest-only periods, offering lower initial repayments, are appearing in Australia as housing costs climb.

Worsening housing affordability is prompting new approaches to lending but experts warn this new banking practice could land home buyers with bigger repayment bills in the longer-term.

Mortgages with 10-year interest-only loan terms have been available for investment properties for decades and are now opening to owner-occupiers, including the fast-growing group of older Australians who are heading into retirement with home loan debt.

The nation’s 11th-largest bank, AMP Bank, says its new 10-year interest-only home loan is an Australian first, and it expects other lenders will follow it.

These types of mortgages are offered by some lenders in Britain, the US and Europe, and AMP Bank director of lending and everyday banking Michael Christofides said they offered flexibility and a potential cash flow boost.

Rate cuts are coming, but nowhere near how much they’ve risen since 2022. Picture: iStock

“We did some research recently and we found for Australians aged 50 and over, almost nine out of 10 believe they will still be paying a mortgage when they retire,” he said.

“We also found one in three are not confident their nest egg will provide an adequate lifestyle.”

AMP Bank calculates that interest-only loans can free up hundreds of dollars per month on some loans, and Mr Christofides said this could enhance some retirees’ quality of life by producing extra cash flow.

“Whilst paying interest only can mean higher overall interest bills, it really depends on the customers’ strategy,” he said.

A big issue with interest-only loans is that no outstanding debt is repaid, so the longer they run, the higher the potential interest bill. The interest rate is also typically higher.

A Canstar analysis of Reserve Bank data found that rates on interest-only mortgages are on average 0.93 of a percentage point higher than for owner-occupier home loans.

Canstar director of data insights Sally Tindall said it was wise to “go in with your eyes open”.

“There are circumstances where it’s appropriate to go on interest only – you may be expecting another child and want a reprieve for a short period of time, or if you’re planning to sell in 10 years’ time and need to free up cash,” she said.

Ms Tindall said Australia’s big four banks currently offered investors a maximum 10 years interest only for investment loans (15 years for CBA) but only five years for owner-occupiers, and she did not expect this to change.

She said figures from banking regulator APRA showed that the proportion of interest-only mortgages in Australia had fallen in the past five years, from 23 per cent to around 10 per cent.

“Most borrowers put a priority on paying down their debt, even in tough times,” Ms Tindall said.

“If you’re just treading water you will pay a lot more interest to your bank over the long term.

“We really need to encourage people to become mortgage free.”

Canstar’s Sally Tindall Picture: Tim Hunter.

AMP Bank’s Michael Christofides,. Picture: Supplied

Oracle Lending Solutions managing director Angelo Benedetti said interest-only loans were popular with borrowers “to a certain extent” but the big banks did not like them for owner-occupiers.

“We are seeing non-bank lenders getting more into them because they can see people doing it tough and how big mortgages are,” he said.

Mr Benedetti said he expected the interest-only trend to increase.

“In certain situations it’s not a bad thing: for some people it means the difference between getting a mortgage or not, and for retirees with an exit strategy it can be a good thing as well,” he said.

“I personally don’t like interest-only, but it has validation and justification at the moment given the way things are going. The cost of living is having a devastating effect on a lot of people, and home ownership is getting harder and harder.”

Originally published as New 10-year interest only home loan highlights borrowers’ pain