Interest-Only-Borrowers Could Be In For A Hard Time

Post by Sharat on December 14, 2017 · Under loans · Comments Off on Interest-Only-Borrowers Could Be In For A Hard Time 

If you are interest-only-borrower, then you have had a difficult year. Not only has APRA cracked down on these kinds of loans but according to the latest research from Morgan Stanley, interest-only-borrowers are more likely to make poor financial decisions and pose a risk to their lenders. The research suggests that interest-only-borrowers have a higher chance of descending into debt and losing their savings if a high cost emerges. They are also likely to sell their property if interest rates rise which means they carry a high financial risk.

Poor managers of money

53 per cent of these types of borrowers used credit cards or consumer finance compared to just 29 per cent of principal and interest borrowers. The analysts at Morgan Stanley say the former save less than the latter and that the gap is even more pronounced for owner occupiers. Lenders have recognised the risks and approvals of interest-only loans has declined from 36 per cent to 30 per cent. Wayne Byres APRA chairman says that may not be enough to mitigate the risks of such loans.

The regulator is concerned

Mr Byres says despite a growing number of lenders placing first home buyers under increased scrutiny, there are still concerns when a bank lends more than six times a borrower’s income. He adds that the regulator would like to see banks expend more energy collecting realistic information on borrowers living expenses and use that information in order to determine whether a loan applicant poses a risk.

Ending up in hot water

Experts worry that with banks tightening their lending criteria, interest-only borrowers are going to find themselves in trouble at some point. For example, if you took out an interest-only loan five years ago when property was booming, it is now no longer possible to roll over the debt because banks have changed their lending criteria. If they decide to opt for a principal and interest loan instead, they are obviously going to face higher repayments of as much as 40 per cent which would mean they would either have to sell or refinance.

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