Customers with interest-only loans are likely to be charged an even higher premium by banks compared with those who are also paying back principal.
Interest-only loans are the prime targets of a crackdown by regulators intent on cooling the mortgage market.
In March the Australian Prudential Regulation Authority – APRA – ordered banks to lower the proportion of new interest-only lending to 30 per cent; and since then banks have invreased the cost of interest-only loans by up to 0.56%.
Close watchers of the home loan market believe this gap is only likely to widen further in the future, as growth-hungry banks try to convince more customers to pay off principal on their loan, giving lenders more room to expand their interest-only lending without falling foul of APRA’s cap.
If APRA continues to apply pressure on the banks and brings other lenders under its control, the average gap is likely to grow by 0.20-0.40% more
Interest-only loans typically revert to being principal and interest loans after about five years.
Significantly, owner-occupiers who are paying principal and interest are benefiting from greater competition among banks to secure their business in this environment.
So where are you at? What is the best option for you?
Interest Only or P&I? Or should you consider fixing your rate?