ANZ shakes up interest-only home loans

William Jolly By on March 15, 2019
 
ANZ shakes up interest-only lending

Big four lender ANZ has announced major changes to its interest-only mortgages following a period of conservative lending.

ANZ said on Thursday it would resume offering customers an interest-only loan period of up to 10 years, where the previous limit was five.

Interest-only customers can also now have a deposit of only 10%, instead of the previously required 20%.

Chief executive Shayne Elliot last month admitted ANZ had been “overly conservative” in its lending practices, and these changes to interest-only loans are a clear attempt at driving growth in the housing market, which has been slowing rapidly in recent months.

This move has been made possible by APRA removing its cap on interest-only mortgages last year.

Previously a maximum of 30% of new home loans could be interest-only, which APRA said was implemented to reign in higher-risk loans.

According to The Australian Financial Review, ANZ told mortgage brokers these policies had been first put in place after APRA’s requirements were made in 2017.

“On recent review, we have made a decision to increase our focus on the investor market,” ANZ said.

“The upcoming changes demonstrate our continued appetite in the investor market, whilst ensuring we remain in line with our APRA requirements.”

These changes mean ANZ now offers a longer interest-only period than any of its big four rivals, although the others already offered loans with a 10% deposit.

Variable interest-only home loans

Provider Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
 
Real Deal IO Special Offer 80% 3.32% 3.33% $1,107 More details
Low Rate Home Loan w/Offset 3.40% 3.42% $1,133 More details
Great Rate Discount Variable 3.57% 3.58% $1,190 More details
Budget Owner-Occupied IO 3.61% 3.49% $1,203 More details
Simplicity Plus Special Offer 3.92% 3.93% $1,307 More details
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
Real Deal IO Special Offer 80%
3.32% 3.33% $1,107
More details
Low Rate Home Loan w/Offset
3.40% 3.42% $1,133
More details
Great Rate Discount Variable
3.57% 3.58% $1,190
More details
Budget Owner-Occupied IO
3.61% 3.49% $1,203
More details
Simplicity Plus Special Offer
3.92% 3.93% $1,307
More details

Base criteria of: a $400,000 loan amount, variable, interest-only (IO) home loans with an LVR (loan-to-value) ratio of at least 80%. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 2 October 2019. View disclaimer.

How do interest-only loans work?

Interest-only loans are loans that allow borrowers to delay repaying the principal (the amount borrowed) for a period of time, which is now up to 10 years with ANZ.

Borrowers only have to make interest repayments during this time, and at the end of this period, the loan reverts back to the standard principal and interest repayments.

The main benefit of an interest-only loan is lower repayments in the short-term, which can help people get their foot in the door for a property they want now.

But when the initial period expires, the final amount paid throughout the home loan will be much greater since none of the initial principal has been paid off.

The table below shows the difference in overall costs between two loans: one interest-only (for five years) and the other principal and interest, for a 30 year, $400,000 loan at an interest rate of 4.0%.

 
Loan
Monthly repayment during IO period Monthly repayment after IO period Total cost (principal & interest) of the loan
 P&I loan $400,000 N/A $1,910 $687,478
IO loan (first five years) $400,000 $1,333 $2,111 $713,404
Total cost difference $25,926  

Essentially interest-only customers sacrifice long-term losses for short-term gains, which has previously made them quite popular with investors.

By selling the property within the interest-only period after making a capital gain, an investor could make a significant profit while minimising their taxable income through negative gearing.

In the next three years, $360 billion worth of interest-only are loans set to transition to requiring principal and interest repayments.

There are concerns in the industry that many holders of these loans will struggle to afford the higher repayments.


For feedback or queries, email will.jolly@savings.com.au

Photo by Tommy Pequinot on Unsplash

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Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in 2018. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate includes both the interest rate and the fees and charges relating to a loan, combined into a single percentage figure. The interest rate per annum is based on a loan credit of $150,000 and a loan term of 25 years.

William Jolly
William Jolly joined Savings.com.au as a Financial Journalist in 2018, after spending two years at financial research firm Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.
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