April 23, 2018 / 10:28 PM / 2 years ago

UPDATE 1-Australians facing interest-only loan expiries, risks small -RBA

(Adds background, detail)

By Wayne Cole

SYDNEY, April 24 (Reuters) - Around A$120 billion of interest only (IO) loans in Australia are due to expire every year between 2018 and 2021 and put pressure on the finances of some borrowers, though a top central banker said the overall impact on households will be modest.

Reserve Bank of Australia (RBA) Governor Christopher Kent was refuting media reports that the expiry of IO loans over the next few years would be akin to the sub-prime crisis in the United States, hammering household spending and forcing a wave of home sales by distressed borrowers.

Kent said some IO borrowers will be willing and able to refinance their loans. Also, many others have built up a sufficient pool of savings to afford higher repayments.

“For the household sector as a whole, the cash flow effect of the transition is likely to be moderate,” said Kent, who heads the central bank’s financial markets unit.

“The effect on household consumption is likely to be even less,” he added. “Indeed, the substantial transition away from interest-only loans over the past year has been relatively smooth overall, and is likely to remain so.”

“Nevertheless, it is something that we will continue to monitor closely.”

IO loans had been unusually popular in Australia, partly because of favourable tax treatment for property investment.

At their peak, IO loans were accounting for 40 percent of all mortgages. However, these types of loans carry more risks than common principal and payment mortgages, leading regulators to tighten standards on such lending.

As a result, banks have raised rates on IO loans and the share of them has dropped to 30 percent of mortgages. (Reporting by Wayne Cole; Editing by Lisa Shumaker and Tom Brown)

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