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There’s a new call for banks to urgently allow home loan borrowers to roll over their interest-only loans indefinitely.
According to Kevin Young, president of Property Club, the Australian Prudential Regulation Authority (APRA) should be following the Reserve Bank of Australia’s recent rate cut by allowing more than 700,000 Australian borrowers to roll over their interest-only loans.
Such a direction would help avoid those borrowers from potentially seeing their mortgage repayments jump by 60 per cent.
Mr Young said many of these borrowers are property investors using property to fund their retirement.
According to the president, 730,000 interestonly loans will expire this year – with any forced move to principal and interest potentially surging their repayments by 60 per cent.
While welcoming the most recent cuts to the official interest rates, Mr Young said it “needs to be followed by APRA ending its policy of enforcing a time frame on interest-only loans, which began in 2015”.
“We cannot have a policy situation where the RBA is cutting interest rates and APRA is increasing mortgage repayments by 60 per cent for hundreds of thousands of borrowers,” he argued.
Having been a property investor for more than 50 years himself, Mr Young said he was never forced to pay principal and interest loan repayments “until APRA changed this policy in 2015 when it overreacted to the overheated Sydney and Melbourne markets at the time, which were correcting after several years of no growth”.
“It then directed all banks not to roll over interest-only periods for borrowers and instead forced them into crippling principal and interest payments. Many were not able to refinance and instead have been forced to sell their properties with some at a huge financial loss,” he stated.
According to the president, “The end result of this crazy APRA-imposed policy is we have seen a massive fall-off in investor activity in the property market, and this is now resulting in an upward pressure on rents.”
“At the same time, this irresponsible policy has put huge emotional pressure on mature property investors who have been investing in property to secure their retirement and been forced to sell their investment properties as they are too old to refinance.”
Mr Young is calling for interest-only loans to again become open-ended to give investors’ confidence to invest in property again.
Instead, “we have a situation where the RBA is planning to dramatically cut rates to help the economy through the coronavirus and APRA is sitting on its hands forcing nearly 1 million Australians to be hit by a 60 per cent increase in their mortgage repayments this year because of their crazy interest-only policy”.
He argued that the big banks can borrow money indefinitely on an interest-only basis from overseas markets, so “ordinary Australians should be allowed to do the same”.
“APRA’s policy of limiting the time period of interest-only repayments has distorted the property market and will only blunt the RBA’s move to stimulate the economy through this latest cut to interest rates,” the president concluded.
Interest is the amount of money charged by a lender or financial institution for a loan, which is calculated as the percentage of the principal amount paid over the loan term.