Property and homeowners are starting to convert their interest-only loans to principal and interest despite still having ample time to enjoy lower upfront payments.
Their reason? Recent regulatory changes are expected to make interest-only payments more expensive.
In a report on ABC News, property investor and mortgage broker Terry Unwin said she and her clients already started shifting to principal and interest rates.
“We looked at our budget and determined we could afford the principal and interest repayments and it meant that we were building equity in that property,” she told ABC News.
Interest-only loans have become a hot commodity among home buyers who are still testing the waters when it comes to home purchases — for a certain period, typically five years, homeowners will only be paying the interest of their loans.
Over the past few years, the difference between the rate of an interest-only loan and the standard home loan has been insignificant, leading to the surge of interest-only borrowers. In fact, ABC News said 40% of all loans in the country in 2015 are interest-only.
In response, the Australian Prudential Regulation Authority ordered lenders to put a 30% cap on interest-only loans, which pushed them to raise rates for existing and new investment loans. This resulted in a significant reduction in the number of interest-only loans, which is now at 15%. However, there are still around $360 billion worth of interest-only loans due to mature in the next three years, according to ABC News.
University of New South Wales School of Economics’ Richard Holden told ABC News that most people will not have the ability to afford their payments once the principal and interest rate kicks in.
“If they all need to sell at the same time, even if that’s 20 per cent of these folks, then that leads to a fire sale and you see something looking scarily like what happened in the United States of America in 2008/2009,” he said.
But these fears could soon be gone up in smoke especially if investors start to make the shift. This gives investors a better chance of getting a more bearable rate.