Got an interest only loan? You must read this!

For many Australians interest only loans have provided a convenient and affordable way to leverage the equity

By Jade Tweedie

25-07-2018 |
For many Australians wanting to get into the investment property market, interest only loans have provided a convenient and affordable way to leverage the equity in their principal place of residence.

This type of loan has been the choice of many investors over the past decade, with around 40% of all mortgages being interest only at their peak.

While this type of loan has been particularly popular with investors, it’s estimated that owner occupiers still account for around 20% of interest only loans.

Whatever the reason for choosing an interest only mortgage product, with around 30 per cent of all mortgage debt subject to an interest only reset between now and 2021, a reckoning is coming for many investors and homeowners. Selling now before a potential increase in distressed sales may be the best course of action for some, especially if you are concerned about your ability to fund higher repayments.

The RBA estimates around $120 billion in loans will reach reset and the majority of those homeowners will experience up to a 40% increase on their mortgage repayments. As interest only loans reach their term over the next four years, it’s expected that interest rates will rise, putting further financial pressure on mortgagees. It’s this financial pressure that is of greatest concern, with homeowners still having no equity in their home at this point. If mortgage repayments become unmanageable, the obvious choice for many will be to sell and cut their losses, however that’s when there are likely to be plenty of others in the same boat. If the majority of IO investors follow this course of action and rush to sell, the market will be flooded with stock, forcing property prices down.

So what is the way forward? If you are at all concerned, you should immediately seek professional financial advice. Depending on your circumstances, it may be possible to re-finance more suitably. Alternatively, you could bite the bullet, tighten your budget now, and convert to a principal plus interest loan as an alternative. If it’s going to happen in a few years anyway, why not start now and focus for five years or so on throwing as much as you can at your mortgage.

Alternatively, selling now, before any kind of rush, could advantage you significantly.