National Australia Bank on Wednesday tipped a 25 basis point rate rise late next year although weaker economic growth will result in a less aggressive rises then it previously estimated.

The RBA has not provided data on the volume, or value, of the loans that might be involved.

Analysis of Australian Prudential Regulation Authority data shows that 27 per cent of authorised deposit institutions all loans, by number, are interest only, down form a peak of nearly 30 per cent in September 2015. There is no equivalent data for non-ADIs.

The value of ADI loans accounts is about $550 billion and outstanding loans around 1.6 million.

'Challenging for buyers'

Richard Holden, professor of economics at University of NSW Business School, warns if the loan reset-rate rise scenario plays out it could "become very challenging for buyers".

Other economists, such as Kate Hickie, for Capital Economics, said at "face value" it could be "concerning" but argues there is not the same systemic threat as there was in the US a decade ago from sub-prime mortgages because of better lending standards.

Australian loans are also recourse, which means a defaulting borrower remains liable for outstanding debt.


The RBA warns there may be some borrowers that do no meet current lending standards for extending their interest-only repayments but would find the step-up to principal and interest repayments difficult manage.

It believes those potentially facing "some financial stress" – defined as where an individual worries about their finances or cannot afford "necessities" – as a "relatively small proportion of borrowers", without providing numbers, or percentages.

The Grattan Institute, an independent think tank, warns a relatively small rise in interest rates by households would crimp spending and squeeze many household budgets.

It estimates a 200 basis point rise in mortgage rates to about 7.25 per cent would have an equivalent impact on family budgets of 17 per cent, the highest since Bob Hawke was prime minister and the 'recession we had to have'.

"It is a double whammy," said Professor Holden about rate rises coinciding with renewing fixed rate loans. "It could mean a very large increase in repayments, which is analogous to a higher hike in interest rates."

Nasty double whammy

Martin North, principal of Digital Finance Analytics said: "There is a collision between those two events. We have the foundations of a very nasty accident."

Lenders are basing their loan calculations on borrowers' cash flows.


"Every time interest rates rise it puts pressure on affordability," he said.

Mr North conservatively estimates $60 billion of of interest-only loans written at the height of the property boom will be reset at higher rates and terms, over the next four years.

Ms Hickie dismisses suggestions interest-only loans are "nearing a precipice", which means they could trigger a calamitous plunge in housing market prices.

She said: "At this stage we doubt it will trigger a US-style collapse in the housing market. It may weigh on consumption growth over the next few years as borrowers have no choice but to devote a higher share of their income to mortgage repayments"

Slowing property markets mean that recent interest-only investors, such as off the plan buyers, could be in negative equity because they have not paid off any of the loan.

"This would clearly limit their ability to refinance," she said. "And it may well prompt them to sell their property, which would exacerbate any slowdown in the housing market. A lot of these borrowers may therefore have not choice but to start paying principal as well as interest."