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‘Ticking time bomb’: $3,600 problem coming for Aussie home-owners

Australia's interest-only borrowers face a new challenge. Images: Getty

Australians with interest-only home loans are facing a “ticking time bomb” with hundreds of thousands of those mortgages to tip over into principal and interest loans in the coming months.

Around 730,000 interest-only loans will become principal and interest loans over the course of 2020, with the average repayment to increase by a whopping $3,600 a year. Most interest-only loans have a set three to five year interest-only period, after which they convert to more expensive principal and interest repayments. 

And if borrowers took out a loan larger than the 2015-16 average of $395,000, the financial sting will be even bigger. 

In fact, borrowers who took out a $1,000,000 loan would see their average monthly repayment rise by $789, or $9,468 over the course of the year, the new research from Finder found. 

Interest-only borrowers will see their repayments increase by as much as $789

Source: Finder

“Borrowers can be hit hard once their mortgage converts to principal and interest, as their repayments can increase significantly,” insights manager at Finder Graham Cooke said on Tuesday. 

“If you know your interest-only loan is expiring this year, it’s important to factor this into your budget.”

The Finder analysis of Australian Prudential Regulation Authority data found that of all mortgages granted over 2015-16, 39 per cent were interest-only, valued at $295 billion. 

“If your interest-only loan is due to expire in the coming months, start comparing your options now. There are hundreds of principal and interest loan products to choose from,” Cooke said.

“Banks will sometimes offer a discounted variable rate on a case-by-case basis in a bid to keep your business. It’s therefore worth negotiating with your lender for the biggest rate discount you can get.”

Mortgage stress increased in January

Around 1.1 million households are facing mortgage stress. Image: Getty

Around 32.8 per cent, or 1.1 million Australian households are experiencing mortgage stress, according to the latest figures from property analysis firm Digital Finance Analytics. 

Digital Finance Analytics’ principal Martin North defines mortgage stress as a cash-flow challenge. 

“If a household is paying out more each month including the mortgage repayments, compared with income received, they are in stress. This is not defined by a set proportion of income going on the mortgage,” he said in early February. 

While mortgage stress is visible across all household groups, it’s more prevalent among young growing families and households on the urban fringes. 

“But the largest cohort are in the disadvantaged fringe, where incomes are below average as well. More than 300,000 households in this group are exposed, comprising 47.2 per cent of all households in this segment.”

However, ratings agency S&P Global paints a more reassuring picture of household spending, noting that the number of households in arrears fell in December. 

"We expect low interest rates and relatively stable employment conditions to keep arrears broadly stable in the coming months, but performance will vary across sectors and borrower types," said S&P Global Ratings analyst Erin Kitson.

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