With reports that almost one million Australian homeowners’ interest-only repayment arrangements will expire from January, the national peak body representing finance brokers says it’s a timely reminder for borrowers to know what they are getting when signing up in the first place.

Peter White, executive director of the Finance Brokers Association of Australia (FBAA) says while interest only loans can be excellent for the right people at the right time, too many borrowers get caught up in the moment, forgetting that home loans need to be repaid eventually.

“At some stage it needs to be dealt with by either entering into a principal and interest loan, refinancing, rolling into another interest only loan if available, or selling the asset,” Mr White said.

“It may seem obvious but before entering into the loan, borrowers need to clearly understand that with interest only loans they are not paying off their loan, and at some point they must begin to.

“Lack of knowledge is a big issue, and it causes unnecessary stress.”

Mr White does believe interest only loans are viable for those bridging a loan or investing, but doesn’t recommend it as a structure for mum and dad borrowers with no gearing needs.

He said finance brokers work closely with borrowers in this situation until the interest only period finishes, to “help minimise any shocks and ensure borrowers are financially prepared to come off the payments and look at their next options.”

“The real issue is that anyone with this type of loan qualified for it, as being able to service that debt on a principal and interest basis to start with.

“In principle, they can afford the repayments but with flat wages and increasing expenses therein lies the challenge.

“The takeaway is to enter into the loan with your eyes wide open, and seek assistance throughout the period to ensure you work towards the best outcome to suit your individual financial situation.”