LEIGH SALES, PRESENTER: As I just mentioned, the Federal Reserve in the US is raising interest rates there.

Professor Wolfers didn't want to speculate but other experts believe it is a matter of time until Australian rates start creeping upwards too - maybe later this year.

That will compound the pressure on many home buyers especially those who are so stretched they've opted for interest-only loans as the only affordable way into the housing market.

Those people are already set to face much higher mortgage repayments, thanks to a crackdown by Australia's banking regulator. It wants more borrowers to pay down principle and interest.

Pat McGrath takes a look at where things could head.

MIRIAM SANDKUHLER, BUYER'S ADVOCATE: I am a licensed buyer's agent, so I provide independent and unbiased advice to clients to help them buy properties that are high performing, they're investment grade and they outperform the market.

PAT MCGRATH, REPORTER: Property is Miriam Sandkuhler's life.

MIRIAM SANDKUHLER: I have my own property portfolio. I have multiple properties within that portfolio which allows me to ride the market, depending on how the market is performing.

PAT MCGRATH: Like many savvy investors, she uses interest-only mortgages to keep a lid on her loan repayments.

But there is just one catch - the interest-only period usually lasts for just five years.

MIRIAM SANDKUHLER: Recently, I've had some of those loans come to fruition where I have gone to refinance them and they had to be converted to principle and interest.

I have been able to wear that.

However, I am certain there are plenty of people in the marketplace who might struggle once that happens to them.

AUCTIONEER: Once, twice, a third and final time!

PAT MCGRATH: Australia's property boom has been accompanied by a massive spike in the number of home buyers signing up for interest-only loans.

But, it is no longer just investors using them.

First-home buyers are joining the interest-only club, as they scramble to get into the property market.

Last year, the proportion of borrowers with interest-only mortgages hit 25 per cent - that triggered fears of a ticking debt bomb.

RICHARD HOLDEN, UNSW ECONOMIST: We have got a huge chunk of loans out there that are interest only. They are typically five-year or so period and when people have to start paying back the principle on those, that is going to send their repayments up a lot and many people might not be able to afford them.

PAT MCGRATH: Economist, Richard Holden, believes rising house prices are behind the spike in demand for interest-only loans and the banks have been more than happy to hand them out.

RICHARD HOLDEN: The banks have lent in a fairly imprudent way. They have lent too much.

People have been encouraged to borrow too much partially by the market and partially by this just general mania about property in Australia and that has led to a very risky situation.

PAT MCGRATH: In March last year, the banking regulator, APRA, decided it was time to intervene to avoid mass defaults in the future.

It ordered the banks to slash the volume of interest-only mortgages to below 30 per cent of new loans.

RICHARD HOLDEN: APRA's actions could very well lead to a nice, smooth diversification of the home loan books of the major lenders.

On the other hand, they could kind of burst this bubble of interest-only loans and so that is the real concern, is that they cause, if you like, a sort of hard landing in the home-loan market.

PAT MCGRATH: APRA's crackdown appears to be working.

Interest-only mortgages now account for less than a quarter of new loans, down from a high of 40 per cent.

LYNNE WISHART: That's my husband's parents.

PAT MCGRATH: Lynne Wishart has an interest-only loan that switches to principle and interest next year.

She wants to extend the interest-only period, but now she has doubts her bank will let her.

LYNNE WISHART: I can only imagine that there will be quite a number of people in maybe a similar situation to us who won't have the excess cash to be able to afford a principle and interest loan.

PAT MCGRATH: Lynne is studying teaching and her husband works full-time.

Two years ago her bank gave her the loan to buy a home for a family member. That family member has since moved out and the rent from her new tenant only just covers the mortgage repayments.

LYNNE WISHART: We don't go out much. We don't buy any new clothes.

(Laughs)

Yeah, we live from pay to pay and if there were any change whatsoever, we would just, we couldn't do it. We would have to sell.

PAT MCGRATH: Lynne's loan is with the Bank of Melbourne, a subsidiary of Westpac.

DAVID COLEMAN (October, 2017): I am going to move onto this issue around interest-only mortgages and so on.

PAT MCGRATH: At a parliamentary hearing last year, Westpac chief executive, Brian Hartzer, was asked how many of his bank's mortgages were interest-only.

BRIAN HARTZER (October, 2017): Interest-only is about 50 per cent.

DAVID COLEMAN (October, 2017): Fifty per cent? So let's just be really clear on this. So basically, half of all people who have a mortgage with Westpac are not paying back any principle? They are just paying interest?

BRIAN HARTZER (October, 2017): That is not the way I would put it.

RICHARD HOLDEN: We don't get in the public and in the economics community visibility into what banks are doing on their own loan books so when Brian Hartzer told the parliamentary committee that more than half his home loan book at Westpac was interest-only, I found that pretty stunning and a little bit shocking to be honest.

PAT MCGRATH: Westpac's lending practices are now being scrutinised in court.

The corporate regulator, ASIC, has accused the bank of irresponsible lending, alleging that over a four-year period it failed to properly assess whether home buyers could meet their repayments.

Now, Lynne Wishart is questioning whether the bank should have given her a loan.

LYNNE WISHART: If you look purely at just the figures, I think you could say that they were irresponsible.

PAT MCGRATH: Westpac declined 7.30's request for an interview, but in a statement said it always assesses a borrower's capacity to meet their repayments even if interest rates rise.

The Australian Bankers' Association, the voice for Australia's big banks, also declined our request for an interview so we couldn't ask about concerns that Australia's banking sector and the economy could be in for a rough ride when more home buyers are forced to repay the principle on their loans.

RICHARD HOLDEN: We might get out of it okay, everything might come to a kind of smooth, a smooth landing, but there is a real risk of some kind of US-style meltdown.

The US mortgage market over a decade or so ago had a really high percentage of what we called adjustable rate mortgages and these were also five-year loans.

The expectation was you would be able to refinance them and get another adjustable rate mortgage at a decent interest rate.

When everyone tried to do that at once and the markets couldn't bear it, people got into a lot of financial distress.

PAT MCGRATH: Miriam Sandkuhler is warning fellow investors and owner-occupiers to brace for bigger repayments or get ready to sell.

MIRIAM SANDKUHLER: Well, they could run into a lot of strife. I mean, a number of them could be forced to have to sell properties and ideally they want to do that in advance of it becoming a distressed sale - very scary for a lot of people, very scary.