Finance experts are concerned with the rising number of interest-only borrowers entering the housing market.

A recent ING Direct report shows one quarter of new loans taken out for home occupation are interest-only. “At the moment,” said ING Direct’s manager of mortgage products Loren Wakely, “there are definitely more owner occupiers that are choosing interest-only loans.

“Customers sometimes want more flexibility with their loans so rather than us dictating the amount of money that needs to be paid back on the loan at any given time they are choosing how much they want to pay back that suits them.”

Data from the National Australia Bank supports that of ING Direct. The NAB has seen 32 per cent of new mortgage applicants asking for interest-only loans.

But don’t think interest-only is just a cheap form of rent. When interest rates increase so too do the repayments. Economic forecasters are predicting interest rates to go up midway through next year. Those who take out interest-only mortgages at the current 2.5 per cent and budget for that will then be in for a nasty surprise.

Finder.com, a comparison website, calculated that on a 30 year $500,000 loan, at the average standard variable rate of 5.3 per cent, the monthly repayments work out to be $566 a month cheaper for an interest-only as against a monthly principal loan.

For speculators betting on the continued rise of housing prices this might seem a good gamble. But for owner occupiers it could be a false economy. Interest-only occupants are effectively renting their home from the lender, they are the ones exposed to the volatility of interest rates, they are the ones with no equity in the home they purchase and live in.

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