The simple mortgage fix that could save you thousands

HOME loan customers are far better off steering clear of interest-only loans and instead paying principal and interest as banks punish customers who are not paying down their debt.

It comes as News Corp can reveal the nation's big four banks will all meet the banking regulator - the Australian Prudential and Regulation Authority's - cap to reduce interest-only lending to under the 30 per cent mark by the end of this month after it was climbing at a rapid pace.

New analysis by financial comparison website RateCity has found for borrowers with a $300,000 principal and interest loan, pay $1485 in monthly repayments on the average rate of 4.3 per cent. That is the same amount customers on interest-only loans pay with a rate of 5.94 per cent.

For those paying lower interest-only rates (less than 5.94 per cent) the difference compared to principal and interest repayments is only minimal and is sometimes only a few hundred dollars more per month.

New figures show the appetite for interest-only loans continues to sour nationally - Mortgage Choice data found last year 36 per cent of all loans written by the broking firm were interest-only but this has nearly halved to about 20 per cent in recent months.

Chief executive officer John Flavell said in many instances customers are better sticking with paying principal and interest than interest-only.

"In fact, in some instances - depending on how much money the property owner was borrowing - it was actually cheaper for some buyers to make principal and interest repayments rather than interest only payments,'' he said.

"As such, we saw a drop in the overall level of interest only activity."

Many banks have continued to push up the rates on interest-only deals - RateCity data shows on a $300,000 30-year loan the average principal and interest rate is 4.3 per cent, compared to 4.5 per cent for interest-only.

Borrowers should be reviewing their interest rates to ensure they are not paying too much.

Some lenders are even charging customers as much as 1.43 per cent higher just for opting for interest-only instead of principal and interest.

RateCity spokeswoman Sally Tindall said "there's never been a better time to pay principal and interest only."

"Particularly because rates are still at record lows and they are tipped to increase,'' she said.

"If you start paying down your debt now when rates are low it will save you in the long run when rates are higher."

Topics:  editors picks housing mortgage real estate

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