Up to a third of borrowers with interest-only loans may not realise they have them, UBS has warned in a stunning finding from its survey of recent borrowers.

The global investment bank surveyed more than 900 people who had taken out home loans over the past year as part of its research into "liar loans", which found up to a third of people had given inaccurate information on their applications.

The analysts cross-checked their survey results against official data to ensure that their sample was representative of the broader mortgage market.

In most cases it was, but UBS noticed a big anomaly when it came to interest-only loans.

Those are mortgages where the borrower does not repay any of the principal for a fixed period at the start of the loan, meaning their monthly repayments are lower at the beginning but jump dramatically later on.

These loans are often used by investors to enhance their negative gearing tax deductions, but have become increasingly popular with owner-occupiers because of the lower up-front repayments.

The anomaly was that the bank regulator APRA's data showed that more than 35 per cent of new loans over the past year had been interest-only, but only 24 per cent of survey respondents told UBS they had taken out an interest-only loan.

Initially, UBS thought it must be a sampling problem with their survey, but the chances of this producing such a big difference were just 0.1 per cent.

That led the bank's analysts to the shocking conclusion that almost a third of interest-only (IO) home loan customers might not realise they have taken out that kind of mortgage.

"We are concerned that it is likely that approximately one-third of borrowers who have taken out an IO mortgage have little understanding of the product or that their repayments will jump by between 30-60 per cent at the end of the IO period," UBS wrote.

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While the result surprised the analysts themselves, they argue that there is already a lot of evidence that many Australians have a poor understanding of financial products.

"Although this may seem farfetched it needs to be considered in the context of the lack of financial literacy in Australia," UBS observed.

"A recent survey from S&P found 36 per cent of Australians were not financially literate, while ME Bank's survey found 42 per cent did not understand compound interest and 38 per cent had no understanding of an IO mortgage."

Rising repayments could see spending cuts, housing sell-off

Interest-only borrowers have already faced an increase in their mortgage costs, with banks raising rates on these loans in response to regulatory requirements to limit this kind of lending.

UBS found that the average interest-only loan rate for owners occupiers went up nearly half-a-percentage point over the past year, while investors are paying about three-quarters of a percentage point more.

Banks have increased interest-only home loan rates over the past year. ( Supplied: UBS )

The survey revealed that these rate rises have already left 71 per cent of recent interest-only borrowers under moderate to high levels of financial stress.

UBS found that 71 per cent of recent interest-only borrowers already under financial stress. ( Supplied: UBS )

In response, more than half expect to cut back on their household spending in other areas.

A further 15 per cent said they may sell their property or another asset, with nearly a quarter of those under high financial stress considering this option.

UBS found most households would cut other spending to cope with rising mortgage repayments. ( Supplied: UBS )

The economic consequences of these actions could be significant.

With $640 billion of interest-only loans outstanding, UBS estimated that a switch to principal and interest repayments could cost Australian households around $10-15 billion a year in higher repayments.

It describes this impact as "modest" and likely to be spread over several years.

However, UBS warned that a bigger effect may be a stagnation in home prices once consumers are unable to keep borrowing larger amounts due to the regulatory limits on interest-only loans.

"We think the larger and broader implication for the economy of these trends is the indirect lagged impact of current macroprudential tightening on the flow of housing demand, which will likely see flatter house price growth ahead, which will drag on consumption growth via the 'household wealth effect'," UBS forecast.

Rising home prices have encouraged many households to lower their savings rate to maintain or increase their purchases of goods and services — UBS is concerned that stagnant or falling home prices will reverse this trend, hitting consumption, economic growth and employment.