A leading financial services expert has described the rise in interest-only mortgages among first home buyers as “disturbing” and likely to trigger higher loan defaults in the future.
Data published by the Australian Prudential Regulation Authority shows that more first home buyers are resorting to interest-only loans to get a foothold in the property market.
The official statistics show that the total value of interest-only loans made by Australian banks rose by $10 billion to $481 billion in the June quarter.
Historically, interest-only loans have been popular among investment borrowers, but the latest data shows that owner-occupiers now account for a larger proportion of interest-only mortgages compared to June 2015.
Dr Adrian Raftery, a senior lecturer in financial planning at Deakin University, believes the trend in the official data indicates that a time bomb might be ticking for thousands of low-income borrowers who bought into the booming property market in the last 12 months.
“There’s been a lot of brainwashing from the operators of get-rich-quick schemes encouraging investors and owner occupiers to take out interest-only loans,” Dr Raftery told The New Daily
“Brokers are also contributing to the growth of interest-only mortgages because they get bigger trail commissions from banks when borrowers take longer to reduce the principal”.
“This is a disturbing trend.”
The problem with interest-only loans is that borrowers do not build equity in their homes until their mortgage contract requires them to start reducing the principal.
