Home loan switch could cause economic headaches as housing screws tighten

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In just the past six months the amount of interest-only (IO) loans held by the banks have dropped by around $36 billion, according the Australian Prudential Regulation Authority.

APRA can feel pretty chuffed with the result. It is exactly what it wanted in its push to de-risk banks’ balance sheet by quelling the speculative bravado of investors.

But there are obvious side effects in targeting interest-only loans.

They are the instrument of choice for not only investors biding their time in the tax haven provided by negative gearing to make a windfall gain on capital appreciation.

They are also used by maxed-out borrowers repaying as little as possible, hoping for a bit of financial headroom if wages pick up.

Unfortunately wages show no sign of picking up.

As the 19th century Prussian Field Marshall Helmuth Graf von Moltke once noted, “No battle plan survives first contact with the enemy”, and APRA’s insurgency has the IO brigade scampering in retreat.

It is a retreat that will further cripple the spending power of cash-strapped households and has profound implications for the Australian economy, according to the big Swiss investment bank, UBS.

Repayments set to soar

Already household wealth built up by years of rising house prices shows signs of peaking as the market cools.

At the same time savings are being eroded just to pay for the essentials — such as utility bills and mortgages — leaving many households at a financial breaking point.

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