Videos

Australia’s interest only Housing Crisis!! will Destroy Middle Class when Renewals Creep in !

Interest-only loan crackdown ‘could lead to US-style meltdown by 2024

An economist of note is cautioning that Australia’s housing market may experience a crash similar to that seen in the US, as stricter regulations on interest-only mortgages prompt more buyers to begin repaying the principal on their loans.

Economist Richard Holden stated that a significant portion of loans currently available are interest-only, typically for a five-year period. However, when borrowers are required to start repaying the principal, their repayments will increase significantly and may become unaffordable for many. At its peak, around 40% of all new loans issued by banks were interest-only. Professor Holden also mentioned that banks have been lending in a careless manner.

Last March, the Australian Prudential Regulation Authority (APRA) intervened to prevent future mass defaults by ordering banks to reduce interest-only mortgages to less than 30% of new loans. Professor Holden stated that this action may result in a balanced diversification of the major lenders’ home loan portfolios and ensure that interest-only loans are not overly prevalent.

Ms. Wishart’s loan is with The Bank of Melbourne, a subsidiary of Westpac. Recently, Westpac’s lending practices have been scrutinized in court by the Australian Securities and Investments Commission (ASIC) for allegedly failing to properly assess homebuyers’ ability to meet their repayments over a four-year period. This has led Ms. Wishart to question whether the bank should have ever given her a loan, as she believes her family was not financially able to repay an interest-only loan with only one income. Westpac has stated that it always assesses whether a borrower can meet repayments if interest rates rise and has recently released figures showing that it has reduced the number of interest-only loans on its books to 34.2% of its entire mortgage portfolio.

Interest-only mortgages are a type of home loan in which the borrower only pays the interest on the loan for a certain period of time, typically 5-10 years. After that, the borrower must begin paying both the interest and the principal on the loan. While interest-only mortgages can seem attractive because the monthly payments are lower during the interest-only period, they can be risky for borrowers in a number of ways.

First, interest-only mortgages can lead to negative amortization. This occurs when the borrower’s monthly payments do not cover the full amount of interest that is accruing on the loan. As a result, the unpaid interest is added to the principal balance of the loan, causing the borrower to owe more than they originally borrowed.

Second, interest-only mortgages can make it difficult for borrowers to build equity in their home. Equity is the portion of a home’s value that the borrower owns outright, and it can be used as collateral for loans or as a source of funds in times of financial hardship. When a borrower only pays the interest on a loan, they are not paying down the principal, which means they are not building any equity.

Third, interest-only mortgages can be risky for borrowers because they can lead to higher payments when the interest-only period ends. When the borrower is required to start paying both the interest and the principal, their monthly payments can increase significantly. Borrowers who have negative amortization may owe even more than they borrowed, which could make it difficult for them to afford the increased payments.

Fourth, interest-only mortgages can be risky for borrowers because they are more likely to default on the loan. Because of the negative amortization and lack of equity, borrowers may find themselves in a situation where they cannot afford to make the payments and are unable to refinance or sell the home. This can lead to foreclosure and the loss of the home.

Fifth, interest-only mortgages can be risky for borrowers because they are more likely to be adjustable-rate mortgages (ARMs). ARMs have interest rates that can change over time, which means the borrower’s monthly payments can also change. This can make it difficult for borrowers to budget and plan for the future, as they may not know how much their monthly payments will be.

Overall, interest-only mortgages can be risky for borrowers because they can lead to negative amortization, make it difficult to build equity, increase payments when the interest-only period ends, increase the likelihood of default, and can be adjustable-rate mortgages. Borrowers who are considering an interest-only mortgage should carefully consider the risks and make sure they have a plan for how they will handle the increased payments when the interest-only period ends.

Related Articles

Leave a Reply

Back to top button
Close

Adblock Detected

Please consider supporting us by disabling your ad blocker