Interest-only loans proving less popular

New data reveals that property owners are slowly but surely turning away from interest-only (IO) loans and towards principal and interest (P&I).

Exclusive data from uno Home Loans shows that both investor and owner-occupier borrowers of IO loans have been declining over the last six months, which according to a statement by uno, is the first time in a long while.

From a sample size of 5,213 over the last six months from February to August, the percentage of investors seeking out IO loans has fallen down to 30 per cent, a fall of nearly 20 per cent.

During this time, owner-occupiers also fell, albeit less severely, from 15 per cent to 11 per cent.

According to Vincent Turner, uno Home Loans’ CEO, this drop is being pushed by a “massive price disparity”, as opposed to two years ago, when the market was at parity driven by, and the bank’s response to, APRA.

The benefit, Mr Turner said, is twofold. The first is that it is cheaper to get into a P&I loan now from the perspective of the interest rate that is paid. The second is that less interest is paid over time, so the interest bill goes down.

“If you had an IO loan, you paid $2,000 every month, your principal would never change. Therefore, the interest rate staying the same would mean you pay $2,000 every month forever,” Mr Turner explained.

“If you have a P&I loan, and this $2,000 worth of interest, if you pay a bit of the principal off, the interest next month might be $1,987, and so every month you’re paying slightly less interest.”

With this change from IO focus to P&I, Mr Turner can even see housing affordability shifting through influencing certain “distortions”.

"There’s a lot of pundits who think investors are solely responsible for the issues we're seeing with housing affordability, and I don't agree with that approach,” Mr Turner said.

“I think that's making property easier, more affordable, or to buy for everyone, [there] is a number of factors, and removing one of those filters or those distortions of the market, is making it easier for investors to buy things.

“Changing this will impact one of the distortions, which makes housing more affordable.”

Aside from looking at rates and loans, Mr Turner said that it is equally important to always run the numbers.

“If you think rates are important, cool, run the numbers and see if rates have the biggest impact,” he said.

“You might think the IO is better for you, and it might be better for you from a cash-flow perspective, but from a cost perspective, it’s actually got two things that are working against you now, and if you don’t run the numbers, you’re not going to know that.”

[Related: IO flow plunges by 8% at major bank]

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