A mortgage brokerage founder with more than 20 years’ experience is warning that many Australians could lose their homes after coming off interest-only periods on their loans.
Kevin Lee (pictured), who was a former Smartline broker franchisee in the Sydney suburb of Castle Hill for 18 years and a property adviser for nine years, described interest-only loans as “the elephant in the room”.
“I coined that cliché after working at ANZ in the 1990s and witnessing their all too frequent policy and lending rule changes – based entirely on their predictions,” Lee said.
“Right the way through my extensive mortgage career: nothing changed.”
Lee said given that industry experts were predicting another four hikes to the official cash rate before the end of the year, this would take the OCR to at least 3.35% within the next few months.
“We are now seeing banks offer five-year fixed rates in the high 5% and low 6% mark,” he said.
“This figure has more than doubled in the space of six months. I said before the pandemic, if interest rates rose to 7%, about 80% of people who bought a property in the last few years would lose their house. We are almost at that figure now with fixed rates.”
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While it’s hard to accurately report what percentage of mortgage-holders are currently on interest-only loans, the numbers have reduced since APRA tightened lending criteria. Back in 2017, the RBA reported that 23% per cent of owner-occupier lending was interest-only but that figure would be a lot lower now.
Lee said not many people who are paying an interest-only home loan would have sat down with a pen, paper and calculator to work out the difference between their loan repayments.
“Very few people have realised over a 30-year loan term with two years fixed, with the fixed term expiring at the two-year mark, the loan automatically resets and all remaining repayments are calculated at the remaining loan term,” he said.
“When you take out any loan facility, it has a repayment term – depending on the type of loan, it’s usually a 10, 20, 25 or 30-year term. The elephant is built into your loan approval and mortgage documents and the loan automatically resets to principal and interest ‘over the remaining term of the loan’.”
Lee said this resulted in people shifting from two years’ worth of growth of interest-only to 28 years of principal and interest repayments.
“If interest rates increase at the same time, thousands of people would no longer be able to manage their home loan repayments,” he said.
Lee said roughly 40% of residential home loans within the past two years were structured as either two, three or five-year fixed rates.
“I’m guessing a similar percentage applies to business loans too,” he said. “Most residential investors took an interest-only loan and sadly a growing number of owner-occupiers. All these people are rudely referred to (by the industry itself) as punters and each one is purely renting the money.”
Lee said the smart “punters” over the last two years were property sellers.
“Anecdotal evidence suggests there were around 1.1 million residential sales over 2020 and 2021 – these people ‘took advantage’ of the ridiculous property prices being offered and sold out,” he said. “This automatically means there were around 1.1 million new buyers during this time.”
Lee said there was a rise in Australians being unable to afford principal and interest home loan repayments at the commencement of their home loan.
“People cannot afford principal and interest loans because they cannot afford to borrow that amount of money and comfortably make the repayments,” he said. “I noticed this trend happening more and more before I sold my mortgage business in early 2017.”
Lee said people could try to restructure their loan with their bank or go through the arduous task of refinancing to another bank.
“Unfortunately, there are more hurdles than ever before in either of those solutions with current tightened lending policies, significantly higher interest rates and static wages, so most people will struggle to obtain an approval,” he said.