Opinions differ widely on the impact from large numbers of borrowers who have interest-only loans coming up for transition in the next few years.

The more alarmist commentators suggest this a ticking time-bomb while others, including leading RBA officials, suggest the transition from interest-only to principal-and-interest is proceeding smoothly and will not have major impacts for the economy or for property markets.

Regardless of the seriousness or otherwise of the interest-only scenario, leading buyers agent and best-selling author Miriam Sandkuhler has advised borrowers to start thinking and planning now for the impending transition. She says that those who take action early are likely to get the best outcomes.

The Reserve Bank has downplayed fears about the upcoming expiry of interest-only loans, saying that so far the transition has been smooth and that those remaining will be about to handle the transition comfortably.

RBA Assistant Governor Christopher Kent says that that the smooth transition from interest-only loans is “likely to remain so”.

For many years, interest-only loans made up less than 20% of the total loans market, but between 2014 and 2017 they grew in number substantially. At their peak, 60% of new loans by investors were interest-only. They are now about 27% of all loans on the books of the major banks, including around a third of all investor loans.

APRA last year acted to restrict interest-only lending to a maximum of 30% of all new loans.

“The substantial transition away from interest-only loans over the past year has been relatively smooth overall and is likely to remain so,” says Kent. “Nevertheless, it is something that we will continue to monitor closely.”

Loans due to have their interest-only periods expire by 2020 means around $120 billion of interest-only loans rolling over to principal and interest loans soon.

“The annual figure is equivalent to around 7% of the stock of housing credit outstanding,” says Kent. He says the figure “appears large” but is “not unprecedented”.

“At the end of 2016, a similar value of loans was due to have their interest-only periods expire in 2017,” he says.

For those who choose or are forced to switch to P & I loans, repayments may rise 30% – although some suggest that because P & I interest rates are considerably lower than interest only rates, repayments may not rise much at all – especially for loans with a longer repayment term.

Kent says: “Many households have already switched willingly in 2017 in response to pricing differentials, and lending standards were tightened further in recent years”.

He says many borrowers made provisions ahead of time for the rise in required repayments, with half of owner-occupier loans holding prepayment balances of more than six months of scheduled payments.

“For the household sector as a whole, the cashflow effect of the transition is likely to be moderate,” Kent says. “The effect on household consumption is likely to be even less. This is because some interest-only borrowers will be willing and able to refinance their loans.

“Also, many others have built up a sufficient pool of savings, or will be able to redirect their current flow of savings to meet the payments, or have planned for, and will manage, this change in other ways.”

Among the options open to borrowers was to “negotiate an extension to their interest-only period with their current lender or refinance their interest-only loan with a different lender” or refinance into a new P & I loan with a longer term to reduce payments.

“A large majority of borrowers would be eligible to alter their loans in at least one of these ways,” Kent says.

Those who had not built up savings ahead of time or were unable to refinance their loans were “in the minority”, he said, and “more importantly, most of them appear to be in a position to service the additional required payments”.

Sandkuhler says 2019 and 2020 will have the highest levels of borrowers with interest-only loans due for refinancing. She suggests those most at risk include people who bought apartments in areas with rising new supply and the potential for falling values.

She cites the example of a borrower with a $300,000 interest-only loan, at 5.02%, with monthly repayments of $1255. A potential transition scenario was a P&I loan at 4.72%, with monthly payments of $1560, a rise of $305 per month.

In this kind of scenario, and using the same interest rates, a borrower with a $600,000 loan would find their repayments rising from $2510 to $3119, a rise of $609.

Sandkuhler says converting from interest-only to P&I loans can have positive outcomes. Interest rates on P&I loans are significantly lower than the rates applying to interest-only loans so that the amount of interest paid monthly decreases. The new situation also means the borrower is paying off principal so that the overall loan commitment steadily decreases.

If a loan is re-structured over a longer term, it can reduce the monthly repayments.

A “last resort” option for some would be to consider selling the poorest-performing property in their portfolio to reduce their debt.

She says borrowers with an impending transition from an interest-only period had no need to panic but should consider their situation, seek advice from quality specialists in the lending area (such as a good mortgage broker) and take action early (rather than waiting until the deadline is looming).

“Banks are more likely to consider your case if you are in a strong position,” she says.

If you have any concerns about how the new changes may impact your current situation, you can get in touch with a member of our team by filling out a contact form here.