Demand for interest only loans falling: report

October 16, 2017

Demand for interest only home loan products has started to falter, new data has revealed.

According to Mortgage Choice's latest home loan approval data, there has been a significant decline in the proportion of interest only loans written by the brokerage between April and September 2017.

“In March, the Australian Prudential Regulation Authority ordered banks to limit their level of interest only loans to 30% of all new residential mortgages,” Mortgage Choice chief executive officer John Flavell said.

“As a result, most lenders significantly increased their interest only home loan rates in a bid to cool this type of lending.

“Some lenders lifted their interest only rates by as much as 40 basis points, which has since caused demand for this type of product of drop.”

According to Mortgage Choice data, interest only loans accounted for 14.64% of all home loans written throughout the month of September – down from 35.95% in April 2017.

Mr Flavell said this dramatic fall in interest only demand has ultimately encouraged some lenders to review their rates once more.

“Lenders are acutely aware that they have a 30% cap to adhere to. That is why so many lifted their rates back in April and May this year.

“However, it seems for some lenders at least, the pendulum may have swung a little past its centre point and they are now working on bringing it back into place,” he said.

“In recent weeks, we have seen some lenders start to reduce the rates on their interest only loans.

“As a result, we may see demand for this type of product tick back up again over the coming weeks and months.”

Mr Flavell said with that in mind, now was a good time for borrowers and potential property buyers to speak to their mortgage broker.

“The fact is, there are still plenty of lending institutions that are more than happy to offer interest-only loans to owner-occupiers and investors. Borrowers will just need to show good reason for wanting an interest only loan.”

Mr Flavell said a mortgage broker can help borrowers find the right home loan solution – be it an interest only or a principal and interest product – for a borrower's unique financial situation.