Can interest-only repayments breathe life into the Australian market?

According to the RBA’s most recent Financial Stability report, over 50 per cent of Australian borrowers are more than four years ahead of schedule regarding their home loan repayments, despite 10 consecutive interest rate rise adding up to $1,100 to their monthly repayments.

Building on this, Mr Bouris insisted, “Australian borrowers are pretty safe and historically have always proven to be safe.” He shared that Yellow Brick Road, the lending business he is executive chairman of, is “seeing very little applications for distress.”

To Mr Bouris, this data indicates that “there’s a lot of people who can go on interest only if they’re in [mortgage] trouble or [if] they’re thrown a bit of pressure, or, alternatively, they just want to take some principal payments out.”

Recalling how during the COVID-19 pandemic, the Morrison government allowed borrowers to switch their repayment method, Mr Bouris explained he sees no reason “why this federal government shouldn’t use that as an initiative to help people who are struggling a little bit.”

Noting the presence and importance of prudential responsible lending, he noted he’d “not be surprised if I saw some lenders either make applications to the regulator or, alternatively, go out on a limb and start to offer that opportunity again for those who may be ahead of schedule.”

Shifting temporarily to interest-only repayments to assist households weathering the turbulent financial storm created by high inflation and consistent cash rate increases is a “smart banking move,” in Mr Bouris’ estimation. 

Rather than free up more disposable income, he believes such moves would allow borrowers to “go and buy something else to take advantage of the property market.”

Going on further, Mr Bouris suggested banks could look at applying provisions to borrowers shifting to interest-only payments.

“[Maybe they say], ‘Listen, you can go onto IO because you’re ahead of schedule, but only on the basis that you take out a new loan with us in relation to a new property you want to buy,’ and you apply that principle amount you were once applying to the P&I; you now start to apply that to interest in the new environment as long as you get a tenant in there as well.”

Acknowledging that “it’s all about risk avoidance,” he declared, “There can be a case made where this is not creating risk.”

Mr Bouris added, “You can put in buffers and all sorts of things like for the avoidance of risk [whether they be from] the regulator or the banks, to convince the regulator they’re not doing risky lending.”

Listen to the full conversation here.