Ticking time bomb of interest-only home loans

Woman with financial problems

Statistics from the Reserve Bank show  more people are opting for an interest-only loan when buying a home.
In January, 30 per cent of loans to owner-occupiers were interest-only, but by May it had drifted up to 33 per cent.
An interest-only loan will typically have lower repayments than a principal and interest loan — because repayments only cover the interest. The downside is that payments do not reduce the amount borrowed by a single cent.
All can be well until one of two things happen. Interest rates go up or the interest-only period ends and the borrower is forced into a principal and interest loan — which can add hundreds of dollars to monthly repayments and deliver a payment shock.
Borrowers on a tight budget risk not being able to make these higher payments, causing all sorts of financial stresses.
If you opted for an interest-only loan to buy your home, keep an eye on when the agreement ends and what repayments will cost if it is converted to a principal and interest loan.
Interest-only loans are popular with property investors as interest payments are tax deductible. But there is a risk if they are used to buy a home you wouldn’t otherwise be able to afford. According to the RBNZ, 28 per cent of all mortgages are interest-only.
Gone south
We learned this week  the Transport Agency has decided against a heavy rail link between Auckland CBD and the country’s largest airport. Although a light rail system is apparently being considered. Woopdee-do!
This is so short-sighted because a rail network out to the South Auckland airport would not only serve travellers, but anyone working there, as well as people living along its route working in the city. Think of the hundreds of cars it would take off the Southern Motorway.
A light rail system simply won’t be fast enough to move enough people efficiently, it will just trundle along like something out of Thomas The Tank Engine, a toy-town solution for the engine room of the country.
A world-class city with the severe congestion we face every day on the roads needs a world-class train network.
And what’s currently on offer falls well short of what we need.
Apartment building is ramping up according to property firm CBRE. It says in 2013, less than 500 new Auckland apartments were planned but that figure jumped to 1000 during 2015. It says that up to 2500 new units could be completed this year, and that next year 4000 units are planned.
Interest rates
The ASB has raised its floating mortgage rate by 10 basis points, taking it to 5.65 per cent. The bank has not said why it raised its rate, but there are no apparent reasons — even taking Brexit into account.  KiwiBank’s floating rate is 5.45 per cent.
Among the better fixed-rate deals include ASB’s and BNZ’s 4.19 per cent for two years.
Famous home
If you are into real estate trivia, then you might be interested to know that the Philadelphia home where Oscar-winning actress Grace Kelly grew up is on the market for US$1 million (NZ$1.41 million). The home was built in 1935 and is an historical landmark.