This stunning ASIC infographic shows how much extra money your interest-only home loan costs you

Tempted? There will be consequences… Picture: Lucasfilm

There has been a lot of concern amongst Australia’s regulators about the surge in investor loans and the impact on the housing market and the prudential regulator, APRA, has cracked down on the sector.

But an associated concern has been the increased prevalence of borrowers taking out interest-only loans, which only service the interest cost of the home loan and don’t repay any principal.

APRA and the Reserve Bank see them as a concern for financial stability.

In the wake of recent regulatory reviews by APRA, and the RBA’s comments in last week’s Financial Stability Review that standards at Australian banks have slipped so far that institutions have not only undershot APRA’s prudential expectations, some may have breached their responsible lending obligations, the corporate watchdog, ASIC, has issued its own warning to consumers on interest-only mortgages.

ASIC deputy chairman Peter Kell said the new tools, which include an interest-only mortgage calculator and this extensive interest-only infographic (reproduced in three parts below) had been issued to help give consumers information.

That was necessary, the ASIC website says, because like APRA, “ASIC’s review had found that banks and other lenders needed to lift their game to ensure compliance with responsible lending obligations”.

Kell stressed:

“While an interest-only mortgage may be attractive due to their initial lower repayments, they generally cost more in the long run. Some lenders have also started charging higher interest rates on interest-only mortgages compared to principal and interest mortgages.”

He also highlighted that borrowers need to be ready for the increase in repayments once the interest-only period ends, “to ensure they can afford the repayments, which may increase significantly”.

Here’s ASIC’s excellent explainer:

Interest-only loans have increased sharply

Interest-only loans have grown by an incredible 60% in the last 2 years from a little less than $89 billion to almost $145 billion.

That’s worried ASIC and other regulators because of the pitfalls and the fact that so many investment loans are now financed interest-only. This is likely to maximise tax benefits of negative gearing but leaves principal unpaid.

Reproduced with permission of ASIC

Interest-only might save money now but cost more in the end

During the interest-only period the principal does not amortize (reduce) the way a principal and interest does. That maximises interest payments, and tax deductions under negative gearing.

However, it still costs significantly more over the life of a loan. In the case of 10-year interest only period, it’s an extra 7.5% of total repayments over a principal an interest loan taken under the same rate and term.

Reproduced with permission of ASIC

Think before you leap

In the end, all ASIC wants consumers to do is understand the risk, the cost, and the alternatives.

In doing so, it clearly believes borrowers who are cash-constrained will make other choices.

Reproduced with permission of ASIC

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