The Australian Securities & Investments Commission’s stand that interest-only loans will not have a life beyond five years is going to prove difficult to property owners for continuing their future repayments. The occurrence of a big leap in repayments of the principal and interest by about 40% would necessitate most households to make provisions for refinance. Consumption could also likely be affected by the steep rise.
The RBA disclosed in their three-monthly monetary policy statement that a $400,000 loan could entail an increase of about $7,000 in the repayments after the five year switch. The people who were greatly leveraged were more at risk and the possibility of their needing to forfeit their properties due to non-repayment could not be ruled out. If the general economic conditions took a turn for the worse then this risk would further increase.
In the past year a ceiling was fixed at 30% of the total loan amount for interest-only loans to put a hold on the rising real estate market in various cities of Australia. The three-monthly statement then presented a positive picture for the Australian economy wherein the vital forecasts remained more or less the same. The predictions for December 2019 of GDP and headline inflation included an increase of 3.25% and 2.25% respectively while unemployment would dip by 5.25%. Increase in wages would occur on the tightening of labor market.
The RBA was not very worried with the present status of the Chinese-American trade relations; however, it cautioned that global growth could be hampered considerably if there was a further increase in trade embargo between the two. In that scenario, financial markets would be affected with a fall in global trade.
The RBA felt that the situation did not necessitate a cash rate adjustment in the coming future. It stated however, that further depreciation in the Australian dollar would slow down growth of the economy and inflation.
All interest-only loan borrowers needed to make planned provisions for their repayment schedules in the future!