ANZ shakes up interest-only home loans

William Jolly By on March 15, 2019

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.

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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