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Interest-only loans become a ticking time bomb

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An increase in interest would only make the situation worse

Around 900,000 borrowers may have been keeping a time bomb waiting to explode as their interest-only loans shift to principal and interest in the next two years.

Industry expert Graham Cooke told 9news.com.au that these borrowers have a higher risk of suffering from mortgage stress as their loans revert.

From 2014-2015, around two in five home loans taken are interest-only, which, over the next two years, will change to principal and interest. This translates to roughly $295bn worth of loans.

Also Read: ​What should you do when the interest-only period ends?

“People are paying just the interest on their mortgage with the idea that the principal value is going to increase so they never really taking anything off the principal value," Cooke said.

He added that while interest-only loans present an attractive opportunity at the beginning, many buyers may feel complacent, failing to strategize for when the time comes that they have to pay for principal and interest.

“It’s going to cost the mortgage-holders around $400 extra per month. That’s with current interest rates. If the mortgage rates go up, it’ll cost even more than that," Cooke said.

Given that other essential household costs, including electricity prices, continue to skyrocket, Cooke believes many families could suffer mortgage stress as the reality sinks in.

"It just happens to be coming at a time when some households are in a little bit of difficulty as inflation’s low and wages not really growing," he said.

Cooke added that it will be difficult for families to take another interest-only loan as chances become slim with the stricter lending rules.

"Lending criteria are much stricter now so they’ll find it much more difficult to get a second loan, so they’re going to be forced to pay the higher rate," he said.

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