Australians Face Huge Spike in Repayments as Interest-Only Home Loans Expire

Day of Reckoning: Hundreds of thousands of interest-only loan terms expire each year for the next few years.

The Reserve Bank of Australia (RBA), Australia's central bank, warns of a $7000 Spike in Loan Repayments as interest-only term periods expire.

Every year for the next three years, up to an estimated 200,000 home loans will be moved from low repayments to higher repayments as their interest-only loans expire. The median increase in payments is around $7000 a year, according to the RBA.

What happens if people can’t afford the big hike in loan repayments? They may have to sell up, which could see a wave of houses being sold into a falling market. The RBA has been paying careful attention to this because the scale of the issue is potentially enough to send shockwaves through the whole economy.

Interest Only Period

In 2017, the government cracked down hard on interest-only loans. Those loans generally have an interest-only period lasting five years. When it expires, some borrowers would simply roll it over for another five years. Now, however, many will not all be able to, and will instead have to start paying back the loan itself.

That extra repayment is a big increase. Even though the interest rate falls slightly when you start paying off the principal, the extra payment required is substantial.

Loan Payments

RBA Unconcerned

For now, the RBA is unconcerned: “This upper-bound estimate of the effect is relatively modest,” the RBA said.

Good luck with that.

Mike "Mish" Shedlock

Comments (10)
No. 1-10
MarkBC
MarkBC

What I don't get is why a home mortgage renewal is treated as a whole new loan, subject to increased interest rates, as if the borrower had the choice not to renew. The purpose of raising interest rates, supposedly, is to cool down a heated economy by reducing the benefit of borrowing money. But mortgage renewals are mandatory. So why not exempt mortgage renewals from interest-rate increases? The interest rate should be allowed to drop for taking a longer term, etc, but renewals add no money to the economy, so banks should not be able to use interest rate increases to force foreclosures, which are actually theft of property, since they caused the default.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

Those were the known rules in Australia. Interest only periods expire.

Michaelf
Michaelf

Nothing worries the RBA. If you asked our RBA what would happen to the Australian economy if the lights went out because there was no more electricity, they would respond that there would be little, if any effect because electricity production represents less than 1% of the overall economy. Thats how these dickheads think.

TheLege
TheLege

In places like Australia and the UK mortgages are generally variable rate. It's not like the U.S. where you can fix the rate for the life of the mortgage. Fixed rates are available in Australia/UK but 5yrs is typically the longest (banks are unable to hedge the interest rate risk economically beyond this period). In the example quoted in the article the mortgages are not renewing, they are re-setting (a bit like an adjustable rate mortgage does), although home-owners are free to look at what other lenders are offering, in which case, a new application has to be made, of course. The situation in the UK/Aust makes home-ownership much more risky because when the 'fixed' term rolls off you face the prospect of potentially higher rates. Obviously, rates have been trending down for decades but when the rate cycle eventually turns homeowners rolling off fixed terms into variable rates are going to be in for the shock of their lives.

Realist
Realist

Lege has it correct. Mortgages in Australia are typically amortized over 30 years, but interest rates are usually “fixed” for only 5 years. After 5 years the interest rate will reset based on whatever rates are at that time. Of course, you can also take out a variable rate mortgage, where the rate changes more frequently. As well, mortgages in Australia are “full-recourse”, meaning if you walk away from the house, the lender can go after you for all your assets, not just your house.