The Risk Of Interest-only

The Age

Wednesday September 18, 2002

Gary LaPersonne, editor, mPg

As residential prices soar, a growing number of borrowers are seeking lower repayments, leading to a surge in interest-only loans.

Especially with investors, the benefits are obvious. Apart from tax advantages and the anticipation of house prices continuing to climb, borrowers are questioning why they should pay more now when their financial circumstances can change dramatically in five years or so.

"I don't intend keeping this place for more than five years," says one borrower. "Why lock myself into paying more when there's already been considerable appreciation?"

For example, a standard variable $160,000 loan at 5.5 per cent over 25 years means a repayment of $982 per month. Interest amounts to $733 - or $249 less a month.

After five years the savings from that is almost $15,000. Then again, paying that amount off the principle, gives the borrower the same amount in equity.

Of course, a fixed loan interest rate would be 1 per cent higher, making the incentive for an interest-only loan even more attractive.

The question is whether you are further ahead with the interest-rate loan or with money sitting in equity. The experts say that interest-only loans can be a risky option for some consumers. Here's how they see it:

• It's for those with a lot of credit, good cash flow and a willingness to refinance;

• Regardless of how long you pay, you will always owe the original amount;

• If property values drop, you could owe more than the house is worth.

More great reading

Welcome to mPg's two new columns - Health & fitness and our wine column, On the vine.

Spring is in the air - we think - and it's time to get fit again. Tom Noble, The Age's health and science editor, looks at how you can shape up for summer - in just six weeks. Turn to pages 12-13.

Ben Canaider, a wine columnist for The Age's Epicure section, spends his professional and social life trawling through oceans of wine. Despite the pitfalls that come with having a 24/7 liver and palate on constant standby, he believes the case to quaff wine is watertight. His column is on page 9.

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