A consumer watchdog has warned home owners about “toxic” interest-only loans as a “high-risk borrowing option,” following a recent report saying the average mortgage debt of Australians jumped to $239,000.

CHOICE head of media Tom Godfrey said that when the predicted interest rates rise next year, home owners could find themselves struggling with repayments with little equity to work with.

“While some consumers are attracted to these products when interest rates are low and various asset classes are in a growth phase, when markets contract you can be left with a lot of debt and not much to show for it,” Godfrey said.

“These loans are particularly toxic in the housing market if a significant correction occurs, as happened in 2007-08.”

The Australian Prudential Regulation Authority’s (APRA) report said an average balance on interest-only mortgages went up to $308,000 at the end of September.

This category of home lending now accounts for more than one third of Australia’s $1.3tn home loan market, a report by the New Daily said. 

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