ING makes home loans cheaper for interest-only borrowers

ING made significant cuts of up to 0.60 percentage points to home loans for new borrowers who will only pay off the interest on a loan for the first few years, not the principal as well. The move to attract these borrowers is a little surprising, according to this finance expert.

ING has cut interest-only variable home loans for new owner-occupier borrowers by 0.60 percentage points on Friday, and by 0.15 percentage points for investors.

Borrowers who take out these loans would only pay the amount charged by ING in the form of interest to borrow money from them for the first few years, whereas a principal and interest loan would see borrowers pay back the amount borrowed (the principal) and interest each month for the life of the loan. This means interest-only loans generally have cheaper repayments during the initial interest-only period, before becoming more expensive for the remainder.

ING’s move to make interest-only loans cheaper comes at a time when many borrowers are already struggling with their repayments – even though interest rates are at record lows – and are expected to experience a rate hike to their mortgage interest rate sometime in the next three years, in line with the Reserve Bank’s forecast for a cash rate increase.

“The timing is a little surprising, coming near the bottom of the market and with the likelihood of emerging mortgage stress sometime in the next three years,” Canstar finance expert Steve Mickenbecker said.

ING says customers are assessed for an interest-only loan based on their ability to pay the higher principal and interest payments in the future.

The cuts take ING’s interest-only rate on the Orange Advantage loan down to 2.99% (comparison rate 3.33%) for loans of $500,000 to $999,999 with a loan-to-value ratio (LVR) of 80%. Its principal and interest rate is 0.45 percentage points cheaper at 2.54% (comparison rate 2.89%).

“ING’s cut to owner-occupier interest-only rates today looks like a major reset, reducing the margin that interest-only borrowers pay above the principal and interest rate from 1.05 percentage points to 0.45 percentage points, much more in line with the market average,” Mr Mickenbecker said.

According to home loans listed in Canstar’s database, interest-only variable owner-occupier rates across the board are an average of 0.51 percentage points more expensive than principal and interest rates at the moment, assuming an 80% LVR.

The cheapest variable interest-only home loan for owner-occupiers on our database is currently 2.08% (comparison rate 2.39%) from loans.com.au, for borrowers with a 20% deposit building or buying a new ‘green’ home. On the same terms, principal and interest borrowers would be looking at a cheapest rate of 1.85% (comparison rate 2.21%), also from loans.com.au, though this is a two-year introductory rate currently set to revert to 2.25% after that time.