Douglas Piening 26/2/2018
Interest Only borrowers are paying a huge premium compared to Principal and Interest loans and there are many reasons why this is the case.
It is fair to say that the Banking regulator through their limits on Interest Only lending have reigned in the housing market with some success. The Banks have had to respond with tightening of lending policy and increased (retrospective) pricing for Interest Only loans.
All indications from the regulator APRA are that these limits on bank lending will continue for some time into the future so we shouldn’t expect relief anytime soon. The banks also have a perfectly good justification for higher rates (and therefore profitability) so we don’t expect them to initiate the change either.
The ANZ Bank for example are putting in place steps to give plenty of notice to customers who are coming off Interest Only and start to plan accordingly. This is a good move as it allows customers to give due consideration to their strategy and not automatically roll over their loan to P&I.
These loan limits and resultant tightened policy has resulted in some speculation that when these Interest Only terms expire that many borrowers will find themselves in Mortgage distress, unable to meet the higher Principal & Interest payments. I tend to agree with Richard Wakelin from Wakelin property advisory that smart investors and good assets will be able to adjust to the new conditions.
If you have personal, non-deductible debt then Interest Only is still the best way to preserve your cash flow and pay down other debts first. Your real interest rate is the rate after you account for tax deductions and this, for most investors will still be lower than the rate on offer for Principal and Interest payments.
If you don’t have any personal debt (i.e. a Mortgage on your home) then it may be wise to consider the lower P&I investment rates available and begin to amortise your investment debt. The decisions for each individual when approaching the end of an Interest Only period will depend on the individual circumstances and as always, you are always best to get professional advice to guide your decision making.
Douglas Piening is a Mortgage and Finance Broker with Piening Financial Solutions and is passionate about providing advice you can trust. Whether it’s buying a home, refinancing a loan, investing, building or renovating, Doug brings a wealth of knowledge and expertise to assist with your lending needs.
You can contact Doug at email@example.com or (m) 0408 671 524.
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This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.