The Reserve Bank forewarned last year that about two-thirds of the nation’s interest-only loans, then worth about $360 billion, were set to roll over to principal and interest over the next three years and that those borrowers faced a 30-40% increase in their monthly repayments.
This sparked fears that a significant number of those borrowers would not be able to afford those repayments and because of tighter lending standards, they wouldn’t be able to get another interest-only loan and may be forced to sell.
Financial researcher and analyst Martin North was among those who believed this could be the trigger for a Global Financial Crisis-style housing meltdown in Australia.
But given many lenders are lowering their interest rates after the RBA cut the cash rate this month for the first time in almost three years, and the banking regulator’s cap on interest-only loans has been removed, has the situation changed?
Mr North doesn’t think so, and maintains that Australia still has a “time bomb” on its hands.
“It is still a significant issue because for some it is about not being able to renew your interest-only loan,” the principal of research and consultancy firm Digital Finance Analytics said.
“The changes in the past couple of months have not been sufficient to fundamentally change the market.”
Mr North said there were still more than $100 billion worth of interest-only loans, mainly investment loans, that will roll over to principal and interest (P&I) over the next couple of years and many of these customers faced about a 30% increase in repayments, despite the “slight reduction” in interest rates.
“Of those seeking to refinance, a third of them may be able to get another interest-only loan, the other third may switch to P&I, while another third will struggle with the rise in repayments and may have to sell,” he said.
Canstar finance expert Steve Mickenbecker said he believed there might be opportunities for people to roll over to another interest-only loan that did not exist six months ago after the banking regulator removed the restriction on interest-only residential lending at the start of the year.
“In recent times, some of the banks have reduced the premium they are charging for investment loans and interest-only loans,” Mr Mickenbecker said.
“That suggests they have a level of appetite to write those loans again.
“People who have a clean credit record and strong employment history may be able to find another interest-only loan with another lender.”
He said today’s lower interest rates may help some when their loan switches to P&I, but those borrowers would still face a much larger repayment than what they had on interest-only.
Mr North said those who bought during the peak of the market and were now rolling over to P&I loans at a time when their property may be worth less than what they bought it for, may not be able to secure another interest-only loan.
“There are quite a few people in negative equity and those people are very much up against it now,” he said.
“In WA, more than 10% of households are in negative equity.”
Mr Mickenbecker said those who bought in Sydney and Melbourne three or five years ago were likely to be in a better situation than their WA counterparts because they would have had several years of property value gains before prices came off the boil about 18 months ago.