First home buyers encouraged into dangerous loans
The Australian home loan market is changing. From years of skyrocketing growth in new loan sales, lenders are now discounting heavily to win new business. That’s great news for homebuyers who are prepared to shop around for a good loan deal.
Sales of new loans to owner-occupiers are slow, but sales of new home loans to investors are still growing.
The size of the average mortgage is getting bigger. The average Australian home loan size in August 2016 was $363,300, up from $360,900 in July, according to the Australian Bureau of Statistics.
But what is really concerning some experts is the growth in sales of what some describe as dangerous home loans to first home buyer owner-occupiers.
First home buyers warned about dangerous home loans
The total value of interest-only home loans made by Australian banks rose strongly (by $10 billion) in the three months to the 30 June 2016, according to official data from the Australian Prudential Regulation Authority.
Many of these new interest only loans are being sold to first home buyers who are desperate to get a foothold in the property market.
What is an ‘interest-only’ home loan?
An interest only home loan requires the borrower to only repay the interest that accrues on the loan and not the original principal amount borrowed. Many interest only home loans convert to a standard principal and interest home loan at the end of an introductory period. That period may be one or two years or even up to ten years.
Borrowers who take out an interest only loan are betting that the value of their property will not fall and they will be able to eventually repay the principal loan amount with the capital gains from higher property prices.
Interest-only loans have traditionally appealed to investors but increasingly first home buyers are looking at interest only mortgages because of the lower repayments involved.
What is the danger in interest only loans for first home buyers?
Dr Adrian Raftery from Deakin University said the growth in interest only home loan sales to owner occupiers is a disturbing trend and could be a ticking time bomb for first home buyers.
“If interest-only borrowers lose their jobs they have little room to adjust their repayments,” Dr Raftery told The New Daily.
Interest only home loans are not rational for first home buyers who are planning to be owner-occupiers said Dr Raftery.
The Australian Securities and Investments Commission reported that sales of interest only loans are being driven by mortgage brokers. Interest only home loans often deliver higher commission flows to brokers than other home loans because the principal loan amount is not paid down.
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