Australian interest-only borrowers will need to find an additional $7000 per year

THE Reserve Bank of Australia’s assistant governor has warned that mortgage customers on interest-only loans could be forced to come up with thousands of dollars more with lending changes.

MORTGAGE customers on interest-only loans could be forced to come up with thousands of dollars more each year if they are transitioned to paying down the principal.

The Reserve Bank of Australia’s assistant governor Christopher Kent today addressed the Housing Industry Association in Sydney and warned that many borrowers could also end up selling their properties to offload debt as lending conditions continue to change.

In his speech, Mr Kent warned that an interest-only borrower with a $400,000 30-year mortgage and a five-year interest-only period could be forced to come up with an additional repayments $7000 per year if they are moved over to paying principal and interest.

Borrowers who are on interest-only loans may face higher repayments.

Mr Kent described this jump in repayments as “a nontrivial sum for the household concerned.”

At its peak interest-only lending accounted for 40 per cent of all mortgages in Australia but clampdowns on banks have resulted in this dropping.

Banks are now required to limit new interest-only lending to no more than 30 per cent of new mortgage deals.

The option to pay interest-only remains more expensive for borrowers — interest rates are now about 40 basis points above those on loans requiring paying principal and interest repayments.

Borrowers usually pay more if they are signed up to interest-only loans.

Interest-only borrowing has remained a popular strategy for investors relying on capital growth or owner occupiers looking to free up more cash when they are under financial strain.

Many interest-only loans are coming up to their expiry periods but Mr Kent said some borrowers are willingly switching to principal and interest repayments.

However he warned the situation may result in others selling their properties.

“Some interest-only borrowers may have to consider selling their properties to repay their loans,’’ he said.

“Difficult as that may be — most notably for owner-occupiers — doing so could free up cash flow for other purposes.

“It would allow them to extract any equity they have in the property.”

[e-mail]

@sophieelsworth