Market Update-Interest Only Loans

At the peak of the market last year 40% of all new loans were Interest Only.
Interest Only loans are typically for 5 years and then you either apply for another 5 years Interest Only or it rolls onto a Principle and Interest repayment.
Regulators are concerned people may not be able to afford the increased monthly repayments when the time comes as they have a much shorter time to pay off the original loan. As example, a loan 30 year loan that has had 2 Interest Only periods would then require the original loan amount to be paid back over only 20 years.

APRA introduced new stricter measures around residential lending such as:

* The banks had to limit Interest Only Lending to a maximum of 30% of all new residential lending.
* APRA wanted them to restrict instances of Interest Only lending above 80% Loan to value ratio.
* Remain below a 10% growth benchmark for new loans of this type.
* Review their servicing metrics. Which means increase their benchmark for average living expenses to be more realistic with current conditions and increase interest rate buffers to ensure if interest rates were to increased people can still afford their loans.
* Review longer loan terms being offered and that includes loan terms for people over 55 as they needed to ensure that over 55 borrowers had an adequate exit strategy to reduce their debt down to $0 upon retirement.

The banks are starting to make it hard to have more than 5 yrs of Interest Only lending. Some consumers who are going to be forced to pay Principle and Interest may see some tough times ahead.
At the moment though the banks are still competitively looking for new money so if you are in an Interest Only product you may need to plan ahead to assess the impact of the higher Principal and Interest repayments when the Interest Only term expires.

The best thing is to be aware and informed.

If you need more personalised information on your situation Call Me on 1300 INK 000 (1300 465 000).

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