Reserve Bank warns of loan switch cost
Interest-only home borrowers moving to principal and interest loans face a jump of $7000 a year in repayments, the RBA says.
The Reserve Bank has warned interest-only home borrowers switching to principal and interest loans face a jump of about $7000 a year in repayments.
RBA assistant governor Chris Kent told the Housing Industry Association that should economic conditions deteriorate, more interest-only borrowers could have difficulty servicing repayments when interest-only terms expire and they reset to principal and interest loans.
“The rise in scheduled payments amounts to about $7000 per year for the representative interest-only borrower,” he said.
“This is a non-trivial sum for the household concerned.”
While the share of borrowers who could not afford the step-up in scheduled payments and were not eligible for refinancing was currently small, that share could increase if an adverse shock led to a deterioration in overall economic conditions.
The value of interest-only loans in Australia has grown grew to almost 40 per cent of mortgages in recent years and while they had a role to play, interest-only loans could carry greater risks than principal-and-interest loans, Dr Kent cautioned.
According to RBA estimates, about two-thirds of interest-only loans — worth about $120 billion and accounting for around 7 per cent of the stock of housing credit outstanding — are due to have their interest-only periods expire by 2020.
“While the value of loans scheduled to reach the end of the interest-only periods appears large, it is worth emphasising that expirations of this size are not unprecedented,” Dr Kent said.
“What is different now, however, is that many households have already switched willingly in 2017 in response to pricing differentials, and lending standards were tightened further in recent years.
“This could affect the ability of some borrowers to extend their interest-only periods or to refinance to a P & I loan with a longer amortising period so as to reduce required payments on the loan.”
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