Their finding is based on a recent survey conducted by the investment bank, which found only 23.9 per cent of 907 respondents had an interest-only loan, compared with economy-wide figures that show 35.3 per cent of loans are interest-only. Mr Mott said he initially suspected the survey sample had an error, but now believed a "more plausible" reason was that interest-only customers did not properly understand their loan. "We are concerned that it is likely that approximately one third of borrowers who have taken out an interest-only mortgage have little understanding of the product or that their repayments will jump by between 30 and 60 per cent at the end of the interest-only period (depending on the residual term)," he said. "While these loans are well secured, we believe many borrowers may face substantial stress as interest rates rise or when they revert to principal and interest." Mr Mott conceded it may seem "far fetched" to suggest a third of customers didn't understand what they had signed up for, but said it needed to be seen in context of poor financial literacy. He cited a 2014 Standard & Poor's report that said 64 per cent of Australian adults were financially literate - implying 36 per cent were not. Mr Mott also quoted a 2015 survey from ME Bank, saying it showed 38 per cent had "no understanding" of interest-only repayments. Managing director of mortgage broker Homeloanexperts.com, Otto Dargan, agreed many customers may not fully understand the risks and extra costs of interest-only borrowing. "Customers are not astute when it comes to interest-only. It's really only very experienced brokers and bankers who understand the damage of interest-only loans," Mr Dargan said. Analysts are focusing on the risks of interest-only loans after the regulator this year capped at 30 per cent the proportion of new lending banks could do on an interest-only basis, in an attempt to dampen risks in the housing market. These rules may make it harder for customers seeking to refinance after an interest-only period ends. The survey data being used by Mr Mott also found only 67 per cent of respondents had been "completely accurate" in their mortgage application, leading Mr Mott to last month suggest $500 billion loans were inaccurate or "liar loans." Loading Financial regulators have also repeatedly raised the alarm about banks' practices in interest-only lending - a market worth about $460 billion. A 2015 report by the Australian Securities and Investments Commission found "troubling" flaws in banks' credit standards in interest-only lending, saying in many cases lenders over-estimated how much time customers had to repay the bank once their interest-only period ended. Clancy Yeates is a business reporter.
A third of Australian homeowners may be unaware of the risks associated with interest - only mortgages , with a lack of financial literacy possibly to blame , according to a survey by UBS . Interest - only loans offer banks an initial period when they pay off only the interest on the mortgage , but after that has elapsed , they must pay back the main mortgage as well , or refinance . Analyst Jonathan Mott said banks could face increases of between 30 % and 60 % at the end of interest - only periods , which could lead to " substantial stress " . In 2015 , the Australian Securities and Investments Commission questioned banks ' ethical standards in interest - only lending .