Australia: Interest-only loans rolling into Principle and Interest could spark ‘fire sale’

According to the RBA, a total of $360 billion worth of interest-only loans will be converted to principal and interest loans over the next 3 years as the predetermined interest-only period lapses.

These borrowers will be faced with, on average, $7000 more in annual repayments. In addition, with banks under scrutiny and APRA reviewing regulations, refinancing is more difficult than it used to be. As a result, interest-only borrowers unable to absorb the added principle costs or refinance will have no option but to sell their properties.

The kind of nightmare scenario is where a lot of people need to sell at once, and that’s when you see a kind of fire sale mentality and could see very significant downward pressure on prices,” said Professor Richard Holden from the University of New South Wales Business School.

RFi Group’s data indicates that 20% of recent borrowers have an interest only loan, with investors twice as likely (37%) to have one compared to first home buyers (17%). Investors have the added benefit of tax deductions on interest-only loans which is why many choose this repayment method.

First home buyers with interest-only loans are often borrowers looking to enter the market but unable to afford a deposit: younger borrowers are more likely to choose interest-only loans compared to the average borrower.

APRA has already imposed regulations to restrict interest-only loans: in 2017 the regulator limited interest-only loans to 30% of banks’ lending books.

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