Currently, over 40% of new loans in Australia are interest-only (I/O) for the first few years before reverting to principal and interest (P & I) for the remainder of the term. A typical loan is I/O for 5 years, then P & I for 25 years.
Interest-only loans are popular because they conserve the cash flow needed to make the repayments, freeing up funds for more property investment. That is a fine strategy, until the interest-free period comes to an end and the repayments increase by 50%!
At that point, unless the property yield (for investors) or salary (for owner-occupiers) has increased by 50%, the borrower must reach into their pocket to make the increased repayments. The prospect of borrowers defaulting on the loan at that point has been worrying the Australian financial regulators.
As a result, they have required lenders to tighten their credit policies so that interest-only loans are becoming harder to obtain, by assessing a borrower's ability to repay on the increased P & I payments, as opposed to using the I/O payments which they have used up to this time.