The tools, available at ASIC’s moneysmart.gov.au website, are designed to show the costs associated with interest-only mortgages and help people make an informed decision whether an interest-only loan is appropriate for their circumstances.
In August, ASIC forced numerous lenders to improve their interest-only lending practices, but the watchdog’s deputy chair Peter Kell said it’s important that consumers know what they’re agreeing to.
“While an interest-only mortgage may be attractive due to their initial lower repayments, they generally cost more in the long run. Some lenders have also started charging higher interest rates on interest-only mortgages compared to principal and interest mortgages,” Kell said.
“Anyone thinking of taking out an interest-only mortgage needs to have a clear plan of action when the interest-only period ends to ensure they can afford the repayments, which may increase significantly,” he said.
Earlier this year, buyer’s agent Todd Hunter said he was worried about the number of people who had taken out interest only loans in an attempt to break into the then booming Sydney and Melbourne markets.
“It’s just pure desperation on the behalf of people who want to get into those markets right now and they’re using interest-only loans as a way in,” Hunter said.
“It’s scary because people have gone to interest only loans because they can afford to service them over the interest only period, but the repayments are going to skyrocket when that ends,” he said.
While interest rates are at current record lows, ASIC has reminded people they won’t stay that way forever. The regulator said it was important that people ensure they can service a mortgage if rates do rise.
With that in mind, Joe Sirianni, director of broking firm Smartline, has suggested that people should be considering taking advantage of the current interest rate environment.
“With the rates at the level they’re it might be the right time to protect yourself a bit from any rises in the future,” Sirianni said.
“If you can lock yourself into a fixed rate that might be good idea and if you do have an interest-loan it might be the time to switch to principal-and interest and take advantage of the situation to pay down some debt.”
