Back in April, the RBA warned that interest-only lending had reached extreme levels and that borrowers faced potentially sharp repayment burdens when interest rates were reset:
…for IO loans repayments of principal are not required during the IO period, which is typically the first five to ten years of the loan. Instead, scheduled principal repayments start at the end of the IO period, with the balance of the loan then paid off over the residual loan term. As a consequence, for a typical 30-year P&I loan of $400 000 with an interest rate of 4 per cent, borrowers would be ahead on principal repayments by around $38 000, or about 10 per cent of the initial balance, after five years compared with an IO loan (Graph B2)…
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Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
