Home loan options with higher risk are costly for borrowers

Australia’s housing boom has sparked a warning for homebuyers to be wary about risky mortgage tactics. See what it costs.

Homebuyers trying to break into the booming property market with higher-risk home loans are being warned that it could cost them a small fortune, and potentially worse.

Australia’s average new loan amount for owner occupiers has surged from $447,000 to $515,000 in 12 months, according to Bureau of Statistics data, and mortgage specialists say some people are considering risky borrowing strategies just to get a foot in the door.

Comparison website Mozo has analysed the costs of home loan options and found:

• Making interest-only repayments rather than principal and interest can cost more than $34,000 over a typical $400,000 loan’s life.

• Small deposits of 5 per cent, instead of the usual 20 per cent, can cost an extra $82 a month in repayments plus thousands of dollars in lenders mortgage insurance.

• Parents going guarantor to help their children enter the market can put the parent’s own property at risk if the borrower cannot make repayments.

• Extending the loan term from 25 to 30 years could add almost $42,000 to interest costs.

Mozo’s Tom Godfrey says buying property you can afford reduces stress. Picture: Supplied.

Mozo spokesman Tom Godfrey said borrowers should not “fall into the housing FOMO trap”.

“If interest rates start to rise in the next few years and you haven’t had enough time to meaningfully reduce your debt, you run the risk of tumbling out into the cold,” he said.

“No one wants to be left in a position where they are forced to sell their home to pay off the debt, resulting in more lost money and stress.

“Your best option is always to save a decent deposit and buy a property when and where you can afford it.”

Mortgage broker Rebecca Jarrett-Dalton said she was seeing more people consider higher risk home loans because “it’s so challenging to save while renting” and many could not out-save rising prices.

“There’s lots of language around buying now before they won’t be able to buy – both because of price rises themselves and the greater deposit needed as prices grow,” she said.

Some people were borrowing 95 per cent through the federal government’s first home loan deposit scheme but other costs still applied, Ms Jarrett-Dalton said.

“Test run your repayments beforehand, and where you can, take an economic fixed rate for a good chunk as long as this suits longer term goals, but set your repayments on the higher – often variable – rate to build in future-proofing,” she said.

Mortgage broker platform Truesavings.com’s founder, Pete Steel, said some customers were considering riskier loans, and getting a good interest rate deal could help keep their finances healthy.

Mortgage broker Rebecca Jarrett-Dalton says it’s tough to out-save rising property prices.

Mr Steel suggested buyers use online calculators to work out what they could realistically borrow.

“Talk to an expert who has your long-term best interests at heart, and try to avoid expensive risky loans that only profit lenders,” he said.

Financial advisor Canna Campbell said it was important to get expert, tailored support and avoid high-risk loans that put people under stress.

“I really only see high risk home loans from people who are not financially literate, and when it comes to big investment decisions financial education is key,” she said.