With Mortgage finance there is no such thing as a free lunch. Home buyers and homeowners scrambling to lower their mortgage repayments need to think about all the implications for they change to an interest only home loan.
Because there is a high price to pay, eventually, for interest-only mortgage home loans.
The latest interest rate rise has seen many borrowers scrambling for strategies to make their home loan repayments more affordable.
Options include extending the loan term, refinancing on a better rate, old-fashioned belt-tightening and, more controversially, opting for an interest-only product.
Cannex figures show only one in every 100 Australian owner-occupiers sign up for interest-only deals, but anecdotal evidence suggests more people are being tempted to cut growing repayments any way they can.
"I've had a number of clients asking about them recently [because] they're much cheaper than a principal and interest repayment loan," says Anna Mandoki, a financial counsellor with the Financial and Consumer Rights Council in Victoria.
However, she notes a pattern of emerging problems associated with these products: "I would caution people to really think carefully before they consider interest only repayments."
For borrowers suffering the pinch, the appeal of interest-only loans is obvious. Home buyers grappling with a typical $250,000, 25-year mortgage would save themselves $270 a month by abandoning attempts to chip away at the principal and resigning themselves to covering only the outstanding interest bill, according to Cannex calculations.
And those struggling to cover the cost of higher-priced properties in cities such as Sydney and Melbourne, the "savings" would be even more considerable, allowing them to get a toehold in the market at minimal cost.
For all these reasons, a product that was solely a property investor option now has strong appeal for cash-strapped owner-occupiers, says Lisa Montgomery, the national manager of marketing and consumer advocacy with Resi Mortgage Corporation.
But she warns that with the property boom over, home owners can no longer rely on capital gains to carry them through, and that the short-term relief associated with lower repayments can have serious long-term ramifications.
And as David Tennant, director of the Care Financial Counselling Service in Canberra, says, the proliferation of home loans that don't require people to put down deposits, or even stump up their borrowing costs, means many borrowers are already starting out behind the eight ball.
"It's just digging people further into crisis," he says. "It's quite conceivable that we could see situations which started out as negative equity get so much worse."
There's a high price to pay, eventually, for interest-only loans.
The latest interest rate rise has seen many borrowers scrambling for strategies to make their home loan repayments more affordable.
Options include extending the loan term, refinancing on a better rate, old-fashioned belt-tightening and, more controversially, opting for an interest-only product.
Cannex figures show only one in every 100 Australian owner-occupiers sign up for interest-only deals, but anecdotal evidence suggests more people are being tempted to cut growing repayments any way they can.
"I've had a number of clients asking about them recently [because] they're much cheaper than a proper principal repayment loan," says Anna Mandoki, a financial counsellor with the Financial and Consumer Rights Council in Victoria.
However, she notes a pattern of emerging problems associated with these products: "I would caution people to really think carefully before they [go ahead]."
For borrowers suffering the pinch, the appeal of interest-only loans is obvious. Home buyers grappling with a typical $250,000, 25-year mortgage would save themselves $270 a month by abandoning attempts to chip away at the principal and resigning themselves to covering only the outstanding interest bill, according to Cannex calculations.
And those struggling to cover the cost of higher-priced properties in cities such as Sydney and Melbourne, the "savings" would be even more considerable, allowing them to get a toehold in the market at minimal cost.
For all these reasons, a product that was solely a property investor option now has strong appeal for cash-strapped owner-occupiers, says Lisa Montgomery, the national manager of marketing and consumer advocacy with Resi Mortgage Corporation.
But she warns that with the property boom over, home owners can no longer rely on capital gains to carry them through, and that the short-term relief associated with lower repayments can have serious long-term ramifications.
And as David Tennant, director of the Care Financial Counselling Service in Canberra, says, the proliferation of home loans that don't require people to put down deposits, or even stump up their borrowing costs, means many borrowers are already starting out behind the eight ball.
"It's just digging people further into crisis," he says. "It's quite conceivable that we could see situations which started out as negative equity get so much worse."
In Britain, alarm bells are already ringing over the number of interest-only mortgages being taken out, with the regulator, the Financial Services Authority, sending a thinly veiled warning to lenders to get their house in order and putting such products at the top of its list of "emerging retail risks".
One in four borrowers are taking out the mortgages but many have little hope of paying off the capital sum at the end of the term, The Guardian newspaper reported recently.
"Many borrowers, particularly those who have remortgaged to a cheaper deal, may not even understand that they have a loan which, when it matures in 15, 20 or 25 years' time, will leave them with a huge bill," it reported.
"In the worst case, householders in their 50s and 60s could face repossession if they cannot stump up tens or even hundreds of thousands of pounds."
The Australian situation isn't so dire, but in a case which she describes as "the tip of the iceberg", Mandoki says she recently saw a client lose her house after she fell ill, and became unable to meet the repayments on an interest-only mortgage secured through a non-mainstream lender.
Ironically, with a different type of loan, the situation may have been salvageable through the Mortgage Relief Scheme that operates out of Victoria's Department of Human Services, Mandoki says. The scheme offers home owners short-term interest-free loans to help overcome difficulties with home-loan repayments resulting from an unavoidable change in circumstances, such as becoming sick or losing a job.
"But one of the conditions is that it can't be an interest-only loan," she says.
Yet even during affordability crunches, Phil Naylor, chief executive of the Mortgage Industry Association of Australia, says the Australian dream of home ownership is still alive, and recent research shows 90 per cent of borrowers want to pay off their loan sooner.
However, he notes that industry, governments and regulators, need to keep a close eye on trends in this area.
"As it's a time when house prices are high, savings are low, lifestyle compromises are minimal, and people are made to be more responsible for their finances for retirement, the use of these loans for owner-occupants, particularly first-home buyers, should not be encouraged," Naylor says.
Montgomery says that while financial institutions won't turf undisciplined borrowers out of their homes at the end of the term, opting for an interest-only deal means you can only postpone, rather than evade, the repayment of principal: "It must be paid back at some time or another," she says.
And while some suggest proceeding with caution when it comes to interest-only loans, Tennant advises borrowers not to even go there.
"If the only way you can get into the housing market is to take out an interest-only loan, then you can't afford it and you need to rethink your housing needs," he says.
In Australia, about 8.7 million individuals are affected by rate hikes.
Source: Sydney Morning Herald and Cannex
