Interest-only loans falling out of favour

Interest-only loans may once have been a popular option for borrowers but the latest data from one top brokerage suggests they’re now falling out of favour.

According to figures from Mortgage Choice, demand for interest-only loans dropped by more than 20 per cent between February 2017 and February 2018.

“Compared to this time this year, we have seen a dramatic decline in the proportion of interest-only loans and it does not come as a surprise,” said Mortgage Choice’s CEO, John Flavell.

The company’s data revealed that interest-only loans accounted for 12.22 per cent of all home loans written nationally throughout the month of February – down from 35.95 per cent in February 2017.

Flavell pointed to last year’s regulations from APRA – in which banks were ordered to limit their level of interest-only loans to 30 per cent of all new residential mortgages – as the reason behind the fall.

“As a result, many lenders significantly increased their interest-only home loan rates and enforced stricter rules in order to curb demand for this type of product,” he said. “This made it harder for borrowers to qualify for an interest-only mortgage and subsequently, we saw demand drop.”

Looking forward, Flavell said it was possible that lenders could begin to ease the rates or rules on their interest-only products.

“APRA stated last month that lenders were conforming to its requirements, with interest-only mortgages running at about 20 per cent of all new lending,” he said. “This may provide lenders with some leeway to loosen the reins on their interest-only loans.”


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