Many borrowers continue to show a lack of understanding of interest-only loans, even though there has been a greater overall awareness as well as a fall in interest-only loans issued since the survey was taken last year and since the commencement of the banking royal commission, UBS added.

UBS was concerned that of the interest-only loans issued to owner-occupiers, rather than investors, a third of borrowers signed up for the mortgage to benefit from negative gearing, a concession only available to investors.

Additionally, about 14 per cent of those borrowers "expect house price to rise and sell the property before the interest-only period expires", the survey findings show.

UBS also found mortgage brokers were still encouraging customers to take out interest-only loans even despite the Australian Prudential Regulation Authority's clamp down of the product in March, capping it at 30 per cent of new loans.

"We also found that there was a statistically significantly larger number of respondents who secured their loan via the broker channel that stated the "mortgage banker/broker advised me to take out an interest-only loan", the report said.

The Reserve Bank of Australia: interest-only loans are a worry. Louie Douvis

Poor product knowledge

The number of borrowers who didn't know they had interest-only loans has however fallen to 5 per cent from 11 per cent last year, although one in three still didn't know how much their repayments will increase when their interest-only loan period expires.

"We believe interest-only product knowledge remains poor and the more we delve into the data the more concerning the responses," UBS said.

UBS takes a view that a credit crunch in the next two years is likely as will a persistent fall in house prices, particularly in the next year, caused by a cocktail of moving levers including the outcomes of the banking royal commission, the federal election and rising household debt-to-income ratios.

Sydney house prices have fallen 5.6 per cent in the year to August, while Melbourne's prices declined 1.7 per cent in the same period.