Interest only loans- What’s happening?

Interest rates are a hot topic right now.  Up until recent times, home loan rates were identical to investment loan rates It’s not as easy as it once was to apply for an interest only loan. Over the last few months lending for this type of loan has been tightened by the banks in an effort to slow the pace of record growth in investment home loans and encourage borrowers to start paying down their debt.

Lenders are under pressure by APRA (the government regulatory body) to make it less attractive to borrow interest only loans, a strategy intended to protect investors and achieve sustainable growth in the home loan market.

Lenders have responded to the crackdown in different ways. Some now ask for larger deposits for investor loans or have scraped discounts they previously offered. Others have begun to price loans with principle and interest repayments cheaper than interest only loans. Still others now offer better discounts on owner occupied loans or restrict investors to borrow less than owner occupiers.

As these changes vary from lender to lender, it has been difficult for investors to know which way to turn. Many borrowers are worried about whether the changes affect their existing loans or what they should do when they make a change or try to restructure their loan.

As your mortgage broker, we keep up to date with these industry changes and can assist you to assess the best options to suit your needs.

Interest-only loans can be a tax-effective way to invest in property, but they are most effective when accompanied by advice and tax planning.

Because the monthly repayments are minimal for a specified amount of time (usually between 1-5 years), it offers a method to free up funds in the short term for other investments, renovations or to pay off other non-tax-deductible debt.

Problems may however arise when the interest only period ends and borrowers who haven’t planned their finances carefully are unable to pay off the increased instalments, now including principle along with the interest.

Another drawback is that because you are only paying off interest, your original loan amount doesn’t reduce, which equates to a considerably higher cost over the full term of the loan.