IO borrowers warned of repayment spike

According to an analysis of data from the Australian Prudential Regulation Authority (APRA) by comparison site Finder, roughly 730,000 interest-only (IO) home loans will convert to principal and interest (P&I) in 2020.

Such loans were estimated to be settled between 2015 to 2016, when approximately 39 per cent ($295 billion) of new loans were offered with IO terms.

Graham Cooke, insights manager at Finder, has urged borrowers on IO loans to financially prepare ahead of the expiry of the IO period.

“[Borrowers] can be hit hard once their mortgage converts to principal and interest, as their repayments can increase significantly. If you know your IO loan is expiring this year, it’s important to factor this into your budget,” he said. 

The Finder analysis found that the average loan size during the 2015-16 period was $395,000, meaning that interest-only borrowers could pay an extra $3,600 per year if they move to a standard variable loan with an interest rate of 4.80 per cent. 

Moreover, owner-occupiers or investors who borrowed above the $395,000 average could be set to pay an additional $789 per week, or $9,468 annually.

Mr Cooke encouraged IO borrowers to consider refinancing to a more competitive interest rate.

“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,” he added.

“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.”

[Related: FHBs struggling to understand home loan process]