AMP Bank has launched a 10-year interest-only home loan - what could it mean for borrowers?

Interest-only home loans are typically reserved for investors, but this week, in an Australian first, AMP Bank has unveiled a new home loan option that lets both owner-occupiers and investors pay interest-only for up to 10 years.

The bank says that the product is intended to address the changing needs of consumers, “especially retirees and pre-retirees who are seeking additional cashflow for one off large expenses,” or looking to enhance their quality of life in retirement.

AMP Bank also says that, unlike typical products, which require reassessment after five years, this loan requires no mid-term reassessment, providing greater certainty and stability to borrowers for the full interest-only term.

Interest-only home loans: breaking new ground for owner occupiers?

“For investors, interest-only terms of up to 10 years are nothing new,” says Canstar’s data insights director, Sally Tindall. “In fact, late last year, CBA increased its upper time limit for these payments to 15 years for investors, provided borrowers are taking them out in blocks of five years. However, for owner-occupiers, a maximum term of 10 years is breaking new ground.”

This type of lending allows borrowers to reduce their monthly repayments by only covering the interest on the loan for a set period, before reverting to paying both principal and interest.

It’s important to be aware, though, that the cost of interest-only loans can be substantial, especially when considering the lifetime repayments of a loan. Canstar crunched the numbers on a $600,000, 30-year loan for an owner-occupier and found a significant difference in the amount of interest repaid over the life of the loan.

← Mobile/tablet users, scroll sideways to view full table →

“Interest-only payments can be a short-term solution for some owner-occupiers who have hit tough times,” Tindall explains, “however, it’s a strategy that should only be used in extreme circumstances, where the borrower understands the short- and long-term consequences.”

“Certainly, the regulator warns that owner-occupier interest-only applications should have a ‘sound and documented economic basis’ that isn’t based on someone’s inability to pay off both the principal and interest.”

Compare Home Loans

How common are interest-only home loans in Australia?

Interest-only loans peaked around 2015, with nearly half of new loans approved on this basis. However, APRA introduced a 30% cap on interest-only loans in 2017, which was lifted in 2019 when interest-only lending dropped below that threshold. Today, only 9% of new owner-occupier loans start interest-only, compared to 41% for investors.

AMP Bank’s move represents a market-first for Aussie lenders, but whether it signals a broader shift in the industry remains to be seen. Canstar’s analysis of Reserve Bank data shows that at present, interest-only loans are a relatively niche product for owner-occupiers, with the big four banks currently limiting owner-occupier interest-only terms to a maximum of 5 years. Investors may access longer terms-up to 15 years at CBA and 10 years at Westpac, NAB, and ANZ.

“Anyone looking for an interest-only loan should spend time shopping around,” Tindall says. “While our estimates of RBA data show the average owner-occupier interest-only rate for new customers is currently sitting at 6.84 per cent, Canstar’s database has the lowest interest-only rate clocking in at under 5.75 per cent.”

If you’re thinking of purchasing a property, you can compare home loans with Canstar, and giving some initial consideration to how much you can afford to borrow on your salary.

Cover image source: Nils Versemann/Shutterstock.com