Interest-only loans out of vogue with borrowers

March 26, 2018

The latest home loan approval data from Mortgage Choice found the proportion of interest-only loans written by the brokerage fell by more than 20% between February 2017 and February 2018.

According to Mortgage Choice’s data, interest-only loans accounted for 12.22% of all home loans written nationally throughout the month of February – down from 35.95% in February 2017.

“Compared to this time this year, we have seen a dramatic decline in the proportion of interest-only loans and it does not come as a surprise,” Mortgage Choice chief executive officer John Flavell said.

“In March 2017, the Australian Prudential Regulation Authority (APRA) ordered banks to limit their level of interest-only loans to 30% of all new residential mortgages.

“As a result, many lenders significantly increased their interest-only home loan rates and enforced stricter rules in order to curb demand for this type of product.

“This made it harder for borrowers to qualify for an interest-only mortgage and subsequently, we saw demand drop.”  

Looking forward, Mr Flavell said it was possible that lenders could begin to ease the rates or rules on their interest-only products.

“APRA stated last month that lenders were conforming to its requirements, with interest-only mortgages running at about 20% of all new lending.

“This may provide lenders with some leeway to loosen the reins on their interest-only loans.”

Mr Flavell said regardless of broader market conditions, it was important that borrowers speak to their mortgage broker.

 “There are still lenders willing to offer interest-only loans to owner-occupiers and investors wanting this type of product, but they need to be in a strong financial position and have a good reason for wanting an interest-only loan,” he said.

“A mortgage broker can help borrowers find the right home loan solution - whether it be an interest-only or a principal and interest product - for their unique financial situation.”