Look Who it Was Random video

BIG TROUBLE IN LITTLE AUSSI, interest-only loans, There Gonna Have to raise rates to curb inflation

1,966 views · Published 19 December 2017 · 7:07 · Indexed 27 October 2026

Channel: Mike Martins · 2017 · News & Politics

Watch on YouTube

BIG TROUBLE IN LITTLE AUSSI, interest-only loans, There Gonna Have to raise rates to curb inflation

Home loan switch could cause economic headaches as housing screws tighten

The big switch is on in the mortgage market.

Key points:
In past six months $36bn of mortgages switched from interest-only to principal and interest loans
The switch adds up to an extra 50 per cent to loan repayments
APRA likely to tighten lending rules further, targeting loans to home buyers with little surplus cash flow
In just the past six months the amount of interest-only (IO) loans held by the banks have dropped by around $36 billion, according the Australian Prudential Regulation Authority.

APRA can feel pretty chuffed with the result. It is exactly what it wanted in its push to de-risk banks' balance sheet by quelling the speculative bravado of investors.

But there are obvious side effects in targeting interest-only loans.

They are the instrument of choice for not only investors biding their time in the tax haven provided by negative gearing to make a windfall gain on capital appreciation.

They are also used by maxed-out borrowers repaying as little as possible, hoping for a bit of financial headroom if wages pick up.

Unfortunately wages show no sign of picking up.

As the 19th century Prussian Field Marshall Helmuth Graf von Moltke once noted, "No battle plan survives first contact with the enemy", and APRA's insurgency has the IO brigade scampering in retreat.

It is a retreat that will further cripple the spending power of cash-strapped households and has profound implications for the Australian economy, according to the big Swiss investment bank, UBS.

Repayments set to soar
Already household wealth built up by years of rising house prices shows signs of peaking as the market cools.

At the same time savings are being eroded just to pay for the essentials — such as utility bills and mortgages — leaving many households at a financial breaking point.

So far the switch from IO to principal and interest (P&I) has been small, but momentum is building.

"We estimate that the additional household cash-flow hit from switching to P&I was only around $1-$2 billion, or just 0.1-0.2 per cent of total household sector income," UBS chief economist George Tharanou said.

However, Mr Tharanou said there is likely to be a notable and increasingly negative impact over time.

"Those individuals switching from IO to P&I do face a material 'shock' with scheduled mortgage repayments jumping — effectively overnight — by 35-to-50 per cent," he said.

For those with little or no headroom at the moment, a 50 per cent jump in repayments may simply be impossible to finance.

More from this channel