Interest-only loans decoded

Your client may have had interest piqued by interest-only loans; after all, who doesn’t want to pay only the interest owed rather than the principal balance? This type of loan can be especially handy however, there’s no one size fits all rule.

It’s important for your client to establish both needs and plan of attack for paying off a mortgage in order to decide whether an interest-only loan is the way to go. If for example, they want to pay less on monthly repayments, this isn’t the loan option for them, as they’ll end up paying more in the long-run as the interest increases.

However if your client is able to claim a tax deduction on interest (say if they're a property investor), if they've purchased a home they want to live in for a while, or if their main concern is keeping their loan repayments more affordable than the upfront costs that come with buying, interest-only loans can be suitable. But it’s important to note that the interest-only nature of these loans is temporary, usually lasting five to seven years before becoming regular loans.

Peter Kell, the Deputy Chair for ASIC (Australian Securities & Investments Commission), said in a recent statement that ASIC were reviewing individual files to ensure loan requests were appropriate. "While interest-only loans may be a reasonable option for some borrowers, lenders must make appropriate enquiries into the needs and financial circumstances of their customers, and they must be able to demonstrate that they have done so," said Peter.

The ASIC report came out earlier this month (October, 2017), the same time in which financial services company UBS released their own findings on interest-only loans. According to UBS, your client may be unaware they even have an interest-only loan.

UBS reviewed the applications of 907 mortgagees around the country and found that around a third of interest-only borrowers had no idea they had this loan arrangement. With an expected 30-60% jump in mortgage repayments at the end of interest-only lending terms, this could leave these borrowers unprepared and heading towards mortgage stress.

The UBS findings highlight the importance of being informed and educated about your client's financial decisions. If you client is interested in taking out an interest-only loan, which can be harder to get than other loans, talking to a mortgage broker should be their first step.

Recent ASIC research found that more interest-only loans were approved when they came via brokers, rather than directly from lenders. Consulting a broker will also help your clients stay across your finances and know what is happening to their money and investments.