Ticking time bomb of interest-only home loans

Woman with financial problems

Statistics from the Reserve Bank show  more people are opting for an interest-only loan when buying a home.
In January, 30 per cent of loans to owner-occupiers were interest-only, but by May it had drifted up to 33 per cent.
An interest-only loan will typically have lower repayments than a principal and interest loan — because repayments only cover the interest. The downside is that payments do not reduce the amount borrowed by a single cent.
All can be well until one of two things happen. Interest rates go up or the interest-only period ends and the borrower is forced into a principal and interest loan — which can add hundreds of dollars to monthly repayments and deliver a payment shock.
Borrowers on a tight budget risk not being able to make these higher payments, causing all sorts of financial stresses.
If you opted for an interest-only loan to buy your home, keep an eye on when the agreement ends and what repayments will cost if it is converted to a principal and interest loan.
Interest-only loans are popular with property investors as interest payments are tax deductible. But there is a risk if they are used to buy a home you wouldn’t otherwise be able to afford. According to the RBNZ, 28 per cent of all mortgages are interest-only.