Interest-only mortgage risks 'not clear' to Australian borrowers
A third of Australian homeowners may be unaware of the risks associated with interest-only mortgages, with a lack of financial literacy possibly to blame, according to a survey by UBS. Interest-only loans offer lenders an initial period when they pay off only the interest on the mortgage, but after that has elapsed, they must pay back the main loan as well, or refinance. Analyst Jonathan Mott said customers could face increases of between 30% and 60% at the end of interest-only periods, which could lead to "substantial stress". In 2015, the Australian Securities and Investments Commission questioned banks' credit standards in interest-only lending.
A third of customers with interest-only mortgages may not properly understand the type of loan they have taken out, which could put many in "substantial" stress when the time comes to pay their debt, UBS analysts warn.

Amid a regulatory crackdown on interest-only loans, a new report by analysts led by Jonathan Mott highlights the potential for repayment difficulties with this type of mortgage.

Typically, an interest-only loan will allow a customer to only pay interest for the first five years. After that, they must start also paying principal, which raises their monthly payments substantially - or attempt to refinance.

However, the UBS analysts believe there is a real risk many consumers do not realise their mortgage payments will rise in this manner.