Banks have come up with yet another new way to reap more in interest income. Picture: iStock

BANKS stand to reap a half-a-billion-dollar-a-year windfall from jacking up rates on interest-only mortgages.

A growing number of the millions of borrowers who have interest-only loans are being confronted with an ultimatum by their lender — switch to principal-and-interest (P&I) or face a rate hike of as much as 0.15 percentage points.

The largest bank to lift interest-only rates is NAB, which is estimated to have about $86 billion worth of such loans. The 0.1 percentage point rise it imposed in August last year could net about $85 million in extra interest annually.

A NAB spokeswoman said the move was part of it managing “the prevalence of interest-only lending in the Australian housing market”.

“These differentiated rates mean our customers can choose a mortgage structure that best suits them,” she said.

News Corp Australia offered NAB the opportunity to check the interest windfall calculations. It declined.

RBA chart showing recent trends in home loans. Source: Reserve Bank of AustraliaSource:Supplied

Macquarie Bank ratcheted up its interest-only rates on an estimated $10 billion of loans by 0.15 percentage points last year. That could earn it an additional $15 million a year in interest.

It declined to comment.

Justine Davies of financial products research firm Canstar said there was a growing trend towards charging interest-only customers a higher rate. Its database shows 14 lenders doing so.

The Australian Securities and Investments Commission found none was doing so as of the end of 2014.

If all lenders were to follow NAB’s lead and hike by an average of 0.1 percentage points it would net $540 million a year in extra interest.

Reserve Bank data shows about one in four owner-occupied mortgages is interest-only, a share that has been rising over time; two in three investor loans are interest-only.

Recent changes Westpac made to the way it categorises loans have been interpreted as preparation for hiking interest-only rates. A Westpac spokesman said the move was not about “adjusting the interest rate”. But he could not rule out a future adjustment.

The standard term on interest-only loans is five years, although some are as long as 15 years. On a $500,000 loan, monthly interest-only payments in the first five years would be $2093 based on an interest rate of 5 per cent. For the remaining 20 years of the loan, repayments would be $3310.

An increase of 0.1 percentage points adds $42 a month or $500 a year to repayments.

A borrower who chose to switch to P&I to avoid paying that extra interest would need to find $2933 — an extra $840 — per month.