Interest-only mortgages boomed in the U.S. in the 1920s. What followed was the Great Depression. They re-emerged Stateside in the early 2000s. What followed was the GFC and the Great Recession.
In Australia, interest-only loans account for around 35% of the system’s mortgages. But Australia is different, right? Lenders may have better security. The borrowers, though, are similar and some could face challenges when they are called to repay the principal on these loans.
In Spectrum’s view, the Australian residential property market is a large debt-fueled financial bomb. This bomb will not necessarily explode. To diffuse the situation requires APRA to up the ante on banks de-risking and hope the market backdrop remains benign. Else, the faint tic toc sound at present could get somewhat louder…
To read the full report please click here – Spectrum Insights: Can the interest only bomb be defused?