Interest-only loans out of vogue with borrowers

Demand for interest-only loans has dropped significantly across the country since this time last year, according to new data.

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.”

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