MANY mortgage customers are opting for interest-only repayments on their own homes and failing to pay off any mortgage debt despite rates hitting their lowest ever levels.

A large portion of borrowers are failing to make any headway into their borrowings by choosing interest-only repayments in what experts say is a dangerous move that could lead them to financial trouble when rates do rise.

ING Direct figures show about one quarter of owner occupiers taking out new loans opt for interest-only repayments.

ING Direct’s manager of mortgage products Loren Wakeley said there had been an increase in the past five to ten years of owner occupiers paying interest-only on their home loans.

‘At the moment there are definitely more owner occupiers that are choosing interest-only loans,” he said.

‘Customers sometimes want more flexibility with their loans so rather than us dictating the amount of money that needs to be paid back on the loan at any given time they are choosing how much they want to pay back that suits them.’

Mr Wakeley said interest-only repayments are usually permitted for two five-year periods but once 10 years passes it ‘can be tough’ to continue on interest-only repayments.

National Australia Bank data shows about 32 per cent of all new home loans taken out by both owner occupiers and investors are for interest-only repayments.

Interest-only repayments are popular among investors as it allows them to minimise their mortgage repayments in the short term and rely on capital growth in the long term.

But experts said home loan customers should be making significant headway and paying down their mortgage debt given interest rates are so low.

HSBC chief economist Paul Bloxham said the record low cash rate at 2.5 per cent was likely to come to an end in 2015.

‘I don’t think interest rates are going to stay in their lows in perpetuity,” he said.

‘We think the Reserve Bank of Australia may start to lift interest rates from the middle of next year and households should keep that in mind when they are making choices about their repayment behaviour.’

Mr Bloxham said despite some borrowers paying interest-only on their own homes, RBA statistics showed the average Australian was at least 24 months ahead of their home loan repayments.

Westpac figures show a four per cent increase in interest-only loans in the first half of July 2014 compared to the same period last year.

But the bank’s head of home ownership Melanie Evans said the increase of interest-only loans had been driven by the ‘investor market and their desire to manage their interest expenses for tax purposes.’

‘At the same time some owner occupiers have also opted to take out interest only loans for increased flexibility with their monthly repayments,” she said.

Comparison website figures found on a 30-year $300,000 home loan with the average standard variable rate of 5.34 per cent, monthly principal and interest repayments would be $1655 compared to $1325 for interest-only repayments.

On a 30-year $500,000 home loan with the average standard variable rate of 5.3 per cent the monthly principal and interest repayments would be $2776 compared to interest-only repayments of $2208.

But Solace Financial director Scott Quinlan said opting for interest-only repayments on a home loan was not a good idea for owner occupiers.

‘Rates are quite low at the moment so if you are on interest-only and that’s all you can afford and rates increase you could be in a lot of trouble,” he said.

‘The banks will be asking for a lot higher repayments on interest only once rates rise and you won’t have any scope or fat to move your repayments around.”

Posted by News Limited Network on 21st September, 2014