Interest-only home loans a ticking time-bomb, warns UBS

| 04.10,17. 12:51 PM |

Interest-only home loans a ticking time-bomb, warns UBS

Photo: Rates on interest-only loans have risen by nearly half a percentage point for owner-occupiers over the past year. (AAP: Dan Peled)

Up to a third of borrowers with interest-only loans may not realise they have them, UBS has warned in a stunning finding from its survey of recent borrowers.

The global investment bank surveyed more than 900 people who had taken out home loans over the past year as part of its research into "liar loans", where people had given inaccurate information on their applications.

The analysts cross-checked their survey results against official data to ensure that their sample was representative of the broader mortgage market.

In most cases it was, but UBS noticed a big anomaly when it came to interest-only loans.

Those are mortgages where the borrower does not repay any of the principal for a fixed period at the start of the loan, meaning their monthly repayments are lower at the start but jump dramatically later on.

Such loans are often used by investors to enhance their negative gearing tax deductions, but have become increasingly popular with owner-occupiers because of the lower up-front repayments.

The anomaly was that the bank regulator APRA's data showed that more than 35 per cent of new loans over the past year had been interest-only, but only 24 per cent of survey respondents told UBS they had taken out an interest-only loan.

Initially, UBS thought it must be a sampling problem with their survey, but the chances of this producing such a big difference were just 0.1 per cent.

That has led the bank's analysts to the shocking conclusion that almost a third of interest-only (IO) home loan customers might not realise they have taken out that kind of mortgage.

"We are concerned that it is likely that approximately one-third of borrowers who have taken out an IO mortgage have little understanding of the product or that their repayments will jump by between 30-60 per cent at the end of the IO period," UBS wrote.

While the result surprised the analysts themselves, they argue that there is already a lot of evidence that many Australians have a poor understanding of financial products.

"Although this may seem farfetched it needs to be considered in the context of the lack of financial literacy in Australia," UBS observed.

"A recent survey from S&P found 36 per cent of Australians were not financially literate, while ME Bank's survey found 42 per cent did not understand compound interest and 38 per cent had no understanding of an IO mortgage."


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