PHOTO: RBA Governor Phillip Lowe said this week that the next move in interest rates would likely be an increase. SOURCE: SMH

As many as 1.5 million mortgage holders are set to face sharply higher payments over the next four years as interest-only loans convert to principal and interest loans, the Reserve Bank has warned.

Bank officials revealed the figure on Friday, labelling the switchover an “area of potential concern”.

The prudential Regulation Authority has told the banks to wind back the number of interest-only loans, which are mainly used by property investors.

Most are switching to principal and interest loans when the interest-only period expires, where they face increases in payments of 30 to 40 per cent.