ALMOST one million Australian homeowners will be dealt a serious budget blow at the start of next year, and it could be the struggling property market’s “ticking time bomb”.

Analysis by comparison website finder.com.au found that of the $706 billion worth of new home loans approved in 2014-15, a worrying 42 per cent of them were for interest-only repayment arrangements.

And more than 900,000 of them will begin expiring from January, reverting to principal and interest payments.

Graham Cooke, insights manager at finder.com.au, said it would add an average of $400 extra per month to repayments.

“This, combined with falling house prices and predictions of an upwards movement in interest rates, could mean that many people are left really struggling,” he said.

The interest-only loans granted over the course of 2014-15 were worth $295 billion, the highest on record in the past decade.

Household budgets that are already stretched due to higher cost of living and flat wages growth could find it difficult to manage the increase to their bills.

Mr Cooke said one of the reasons people opted to pay just the interest, rather than reduce the size of their mortgages with principal repayments, was budgetary pressures.

So, people who were already in precarious financial positions might not be well-placed to cover the additional money when their interest-only loans expire and revert.

“For those who wanted to slightly reduce mortgage repayments to take a bit of pressure off, it was an appealing product for borrowers,” he said.

“There are a certain proportion of people who made the decision for that reason. Some families will definitely be struggling when the loans revert.”

The Australian Prudential Regulation Authority introduced a range of measures to crack down on interest-only loans, concerned by the mammoth growth.

It included capping the number of interest-only loans that banks can issue.

“Lending growth has moderated, standards have been lifted and oversight has improved, however the environment remains one of heightened risk and there are still some practices that need to be further strengthened,” APRA chairman Wayne Byres said.

A speech by Reserve Bank of Australia assistant governor Christopher Kent in April warned of the potential impacts of the expiry bomb.

“The step-up in required payments at that time for some individual borrowers is nontrivial but for the household sector as a whole, the cash flow effect of the transition is likely to be moderate,” Mr Kent said.

“Some borrowers may experience genuine difficulties when their interest-only periods expire though.”

The most vulnerable were owner-occupiers with high loan-to-value ratios, Mr Kent said.

Adding to the pressure is the falling value of houses. As of September, average home values in Australia’s capital cities have fallen 3.7 per cent over the past 12 months.

The biggest declines have been seen in Sydney, where values tumbled 6.1 per cent, and Melbourne, down 3.4 per cent.

Should they be forced to sell, homeowners will walk away with considerably less. And many believe it will only get worse.

The finance agency UBS forecasts total declines of at least 10 per cent and for the softening to carry on for some time, while AMP Capital has tipped reductions of 20 per cent.

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In more bad news, the number of households experience mortgage stress — where 30 per cent of their income or more goes to home loan repayments — has hit its highest level on record.

In August, analysts estimated that 996,000 households are experiencing mortgage stress, according to Digital Finance Analytics.

“There are a lot of perfect storms brewing in the housing market at the moment,” Mr Cooke said.

“How quickly prices continue to fall will be something to watch closely. It’s unclear if it will be a continuous decline or a softer landing.”