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Competition behind big banks’ cuts to interest-only loan rates

Interest-only mortgage rates are on the way down again.

Interest-only mortgage rates are on the way down again. Photo: Getty

Interest-only mortgages appear to be back in favour, with the big four banks quietly cutting rates on some of the investor-friendly loans.

Interest-only loans allow borrowers to defer payments of principal for up to five years. They are commonly used by investors, who claim the interest as a tax deduction.

Last year, regulator APRA clamped down on banks’ interest-only lending amid worries about household debt levels. Rates rose and the number of new interest-only loans plunged as a result.

Property analysts credited the change with taking some of the heat out of the real estate market.

But just last week, Australia’s two biggest lenders, the Commonwealth Bank and Westpac, cut rates for some interest-only home loans. They were quickly followed by the ANZ and National Australia Bank.

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The ANZ followed two of its competitors in cutting interest-only mortgage rates. Photo: AAP

Among the cuts were up to 40 basis points (to a 4.11 per cent floor) on the ANZ’s fixed rates on “interest in advance” interest-only home loans. ANZ also reduced fixed rates on its owner-occupied, principal-and-interest home loans.

NAB cut its fixed rates on investor loans by up to 35 basis points, with rates now starting at 4.09 per cent. Further, the cuts indicate the banks are not factoring in a Reserve Bank rate hike in the immediate future.

“It’s war,” said Sally Tindall, of RateCity.com.au, which monitors product rates and fees. “The big banks are opening their books again.”

Analysts have suggested the cuts are designed to revive the slower housing market. But it’s also about competition; the big banks want to stop customers going to smaller lenders.

I wouldn’t be going into retirement with an interest-only loan on your own home.

Stuart Wemyss, director of financial advice firm ProSolution Private Clients, says home-owners and investors should not be too concerned about see-sawing bank changes and should “run their own race”.

“I’ve been watching the banks for 15 years and they don’t seem to have a lot of strategy about what they do, and they follow each other very quickly,’’ he said.

He is also cautious about interest-only loans, saying they suit some of the people some of the time.

“An interest-only loan can be very effective because they allow you to control your cash flow,’’ Mr Wemyss said. “If, for example, you think the home might become an investment property.”

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Interest-only loans can be a good option for those who want to keep their first home as an investment after they outgrow it. Photo: Getty

First-home owners might consider an interest-only loan if they think they will eventually move into a larger house and keep their first home as an investment. But they’re not a good idea for those who can afford only the interest payments, and not principal.

“That’s not the way to go and is risky,” Mr Wemyss said. “I wouldn’t be going into retirement with an interest-only loan on your own home. You need to be reducing your debt level as you go into retirement, otherwise you are susceptible to interest rate rises.”

Paul Nugent, a director at buyers’ agents Wakelin Property Advisory, agreed. He said borrowers needed a plan for when their interest-free honeymoon ended, usually after five years.

“The borrower either needs to start making principal repayments or look to roll over into a new interest-only loan,” he said. “Life is a lot easier if the property has performed well over the time frame before that decision is made.

“Good capital growth and rental growth will make it easier to either obtain another interest-only loan or cover the extra monthly repayment costs.”

The warning for investors is that if they buy poor-quality assets, they will struggle when their principal repayment holiday ends, Mr Nugent said.

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