Borrowers with a typical interest-only home loan face a $7,000 jump in their annual mortgage costs when their interest-only period ends and they are forced to start paying back principal, the Reserve Bank says.
With almost $500 billion in interest-only mortgages set to expire in the next four years, RBA assistant governor Christopher Kent on Tuesday said the increase in repayments would be “non-trivial” for a customer with a typical $400,000 loan.
Even so, he was confident most borrowers would be able to absorb the extra cost of their loans when the interest-only period ends, and they are required to start paying back principal.
After the banking regulator last year imposed new caps on interest-only lending, analysts have highlighted the risks faced by some customers when the interest-only period on some loans expires, which typically leads to monthly mortgage payments rising by 30 to 40 per cent.
In a speech in Sydney, Dr Kent said only a “small minority” of customers would have trouble paying their mortgage when their interest-only term expired. The RBA’s data suggested many borrowers would have savings to help them meet the higher payments, and others would be able to refinance their loans.
“For the household sector as a whole, the cash flow effect of the transition is likely to be moderate,” said Dr Kent, who heads the RBA’s financial markets unit.
“The effect on household consumption is likely to be even less,” he added.
“Indeed, the substantial transition away from interest-only (IO) loans over the past year has been relatively smooth overall, and is likely to remain so.”
“Nevertheless, it is something that we will continue to monitor closely.”
The customers who would be most vulnerable to interest-only terms ending were likely to be owner-occupiers with high loan-to-valuation ratios, he said.
In early 2017, banks started to slam the brakes on lending to property investors after the Australian Prudential Regulation Authority introduced new limits on interest only mortgages, which are popular with investors for tax reasons.
New lending to investors contracted by 10.1 per cent over 2017, after banks responded to APRA’s caps by raising interest rates on some loans, tightening their loan criteria, and demanding customers stump up bigger deposits.
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