A bold new mortgage product has just hit the Australian market, and it’s already causing a stir among financial experts, homeowners, and would-be buyers alike.
AMP, one of the country’s major financial institutions, has launched a 10-year, interest-only home loan—an offering that’s being hailed as innovative by some and labelled ‘risky’ by others.
So, what’s all the fuss about, and could this new loan be a game-changer for Australians, or is it a financial pitfall waiting to happen?
Let’s break down what this new mortgage means, who it might benefit, and—most importantly—what you need to watch out for.
Traditionally, most home loans in Australia are structured so that your regular repayments cover both the interest on the loan and a portion of the principal (the amount you borrowed). Over time, this means you gradually pay off your debt and build equity in your home.
Interest-only loans, on the other hand, require you to pay just the interest for a set period—usually up to five years—before switching to principal-and-interest repayments. AMP’s new product doubles that period, allowing borrowers to pay only the interest for a full decade, with no midterm check-ins or reassessments.
And here’s the kicker: unlike most interest-only loans, which are typically aimed at property investors, AMP is marketing this product to owner-occupiers, including retirees and first-home buyers.
The main point of contention is that, after 10 years, you’ll still owe every cent you originally borrowed. You won’t have chipped away at the principal at all.
While this can free up cashflow in the short term, it means you’ll pay significantly more in interest over the life of the loan—and face a potentially steep jump in repayments when the interest-only period ends.
Some experts, like Andrew Mirams of Intuitive Finance, are concerned that this could lure in buyers who can’t really afford a traditional mortgage, setting them up for financial stress down the track. ‘If they can’t afford a 30-year mortgage, then the servicing for this loan is over 20 years and would reduce, not boost, borrowing power for these applications,’ he warns.
Others, like economist Leith van Onselen, worry that this kind of product could fuel even higher house prices and household debt, making Australia’s already expensive property market even more unaffordable.
Despite the risks, there are some scenarios where a 10-year interest-only loan could make sense—especially for older Australians.
Retirees who are asset-rich but cash-poor may benefit from an interest-only loan as a way to access additional funds during retirement without needing to sell their home.
According to AMP’s director of lending, Michael Christofides, the product is intended to provide retirees with greater financial flexibility and peace of mind.
Interest-only loans are also appealing to property investors, as the interest payments are tax-deductible, allowing them to maximise tax benefits while using the extra cash for other investments.
Additionally, homeowners experiencing temporary financial hardship, such as a loss of income or unforeseen expenses, might find interest-only repayments to be a helpful short-term solution to ease their financial burden.
However, as Michelle Cull from Western Sydney University points out, ‘While it may be helpful in managing cashflow in the short-term for these borrowers, it may place them in a worse position in the longer-term.’
A decade without paying down any of your home loan principal is a significant commitment, and it’s important to be aware of the associated risks.
One major concern is the higher total interest paid over the life of the loan, since the principal remains untouched during the interest-only period. When this period ends, borrowers may face a sharp increase in repayments—commonly referred to as ‘repayment shock’—which can lead to financial stress if not anticipated.
Another risk is the lack of equity built; if property values stagnate or decline, borrowers may find themselves in a position of negative equity, owing more than their home is worth.
Additionally, the lower repayments during the interest-only phase may encourage overspending rather than saving or investing the surplus funds. As Compare the Market’s David Koch warns, ‘When you only tackle the interest, you’ll end up paying more in the long run.’
But it’s not a one-size-fits-all solution. If you’re considering this type of loan, it’s crucial to think about your long-term plans. Will you be able to afford higher repayments in 10 years? Do you plan to downsize or sell before then? Are you comfortable with the idea of not reducing your debt?
Finance expert Andrew Grant, an associate professor at the University of Sydney Business School, acknowledges AMP’s new 10-year interest-only mortgage as a sign of innovation in the mortgage market.
His perspective suggests that, while the product introduces a novel approach to home lending, it also necessitates careful consideration regarding its suitability for different borrowers.
Grant’s viewpoint underscores the importance of balancing financial innovation with responsible lending practices.
As with any major financial decision, it pays to do your homework, consider your long-term goals, and seek professional advice.
Have you ever taken out an interest-only loan, or would you consider one in retirement? Do you think this new product is a good idea or a risky move? Share your thoughts and experiences in the comments below.
Also read: With housing costs soaring, is the ‘Bank of Mum and Dad’ the only way in?
