Many of you would have recently noticed that interest rates associated with interest only loans have skyrocketed to well above 5%.
It seems the main driver of these changes are new lending rules from the Australian Prudential Regulation Authority. APRA is demanding that the banks cut back on their new interest-only lending to less than 30 per cent of new loans.
These changes are expected to affect property investors, who regulators see as a key risk in the housing market.
Australia's BIG Four Banks have already increased Standard Variable Rate for interest only loans by approx. 1.00%, however it's important to note that this change will impact all lenders.
The table below details the current Interest Only Standard Variable Rates for Owner-occupied and Investor loans:
So what can you do? There are three main options available.
- Refinance to a new lender with a lower 'interest only' interest rate.
- Switch to a fixed rate 'interest only' product with a slightly lower interest rate.
- Switch from interest only repayments to principle & interest repayments.
It's important to remember that your repayment type is part of your overall borrowing strategy and that it can have an impact on your tax (negative gearing), so it's important you seek the right financial advice from your Accountant.
That being said, we think there has never been a better time to consider principle & interest repayments!
Clients can obtain P&I variable (or fixed rate) around the 3.88% mark at present, however IO borrowers are likely paying approx. 5.28% for any investment lending.
Contact us for a matrix table detailing the difference in monthly repayments from P&I vs IO loans and provides some great insight into the following:
- The difference in monthly repayments between P&I vs IO
- The principle portion in the P&I repayment.
- The increase in repayment when switching from IO to P&I
Eg: A clients with a $500,000 loan would be paying $152.62 extra per month if they switched to P&I repayments, however the new repayment would incorporate a principle component of $735.95 - which reduces their loan balance monthly.
Basically, by paying an extra $152.62 a client will reduce their loan balance by $735.95 per month and/or receive a overall benefit of $583.33 ($735.95 - $152.62 = $583.33)
Also, the interest rate difference (5.28% vs 3.88%) represents a huge interest saving of $7,000 a year! It's time to talk.
Contact us on 1300 978 051 to discuss your lending options.