Despite a crackdown by regulators and a continuing low-interest rate environment, it appears Australians are naturally cautious when it comes to interest-only home loans. Research from Gateway Credit Union (Gateway), reveals 46 per cent of Australians are Adamant Decliners of interest-only home loans.
The findings, from Gateway’s Mortgage Holders Sentiment Report 2017, shows:
- Adamant Decliners (46 per cent) would not consider using interest-only loans due to the perception that they increase debt.
- A further quarter of respondents (25 per cent) are Resistant Approvers, acknowledging the benefits of interest-only loans yet choosing not to utilise them.
- While around one in ten (11 per cent) consider themselves Hesitant Compliers, viewing interest only home loans as bad but still utilising them regardless.
- With almost one in five (18 per cent) associating themselves as Enthusiastic Users, indicating they have used an interest-only home loan because they increase cash flow.
Gateway CEO, Paul Thomas, says the results suggest we are becoming more astute when it comes to our mortgages.
“It’s encouraging to see so many Australians are wary of the dangers around interest-only home loans. While they do serve a purpose for some borrowers, the reality is for many the interest-only home loan can create a precarious situation. Especially if borrowers enter the loan without considering if they can service it once the interest-only period ends.
“With the regulatory limits placed on banking institutions earlier in the year to restrict interest-only loan growth to below 30 per cent, it will become more difficult for borrowers to obtain an interest-only loan. This may be problematic for refinancers in particular, who are looking to refinance to interest-only again and haven’t factored in principal and interest repayments,” said Mr Thomas.
Of the generations, Baby Boomers are most likely to be Adamant Decliners and therefore, less likely to use interest-only products. While Gen Y are most likely to be Enthusiastic Users.
“When it comes to the different generations, it makes sense that younger cohorts are more accepting of interest-only home loans. Many younger Australians are finding it difficult to break into the property market or are at a stage of life – such as starting a family – when they need more cash flow. An interest-only home loan would afford them more flexibility with their finances, suggesting their acceptance may be a result of necessity,” commented Mr Thomas.
Since 2015, the number of Adamant Decliners among mortgage holders has risen by 5 per cent, while Enthusiastic Users among mortgage holders has declined by 4 per cent. Resistant Approvers and Hesitant Compliers remain similar, proportionally.
“Taking out an interest-only home loan may seem like an attractive option, particularly in a low interest rate environment. However, we urge borrowers to use this opportunity to pay down their home loan as much as possible, especially before the RBA begins to raise the cash rate, which many experts predict will happen in the next few months.
“Borrowers might be drawn to the lower repayments during the interest-only period, but they must remember if they aren’t making principal and interest repayments, they effectively are not reducing their debt. If you’re thinking about taking an interest-only home loan, we can’t stress the importance of making sure you can service the loan when it jumps to principal and interest repayments,” concluded Mr Thomas.
About the research
The Gateway Credit Union Mortgage Holder Sentiment Report 2017 is the collation of data gained through a quantitative survey conducted through an online panel. The survey was in field from 12th September to 18th September 2017, obtaining 1,030 completes. The survey sample was nationally representative of Australians over the age of 18 across age, gender and states in Australia.