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Oct 10, 2018

Interest Only Loans

In years gone by, interest only loans have been particularly popular with investors and more recently by speculators in the booming Sydney & Melbourne property markets.

Advantages of interest only lending include:

  • Reduced monthly payment
  • Maximisation of tax benefits for negatively geared properties
  • Using the principal you would normally be required to pay off your investment loan to reduce your owner occupied loan faster

Disadvantages are seen as:

  • Loan balance doesn’t reduce during the interest only term
  • Because you aren’t repaying any of the principal, you pay more interest over the life of the loan.
  • When the interest only period expires, the resultant P&I payments will be much higher than they otherwise would have been if you had selected P&I from the outset.  For example, if you took a 30 year loan with an initial 5 year interest only period, your payments would revert to P&I after 5 years with payments being aligned to the residual 25 year term
  • Higher interest rate

The banks used to be quite flexible with interest only loans but crackdowns by government agencies

have seen interest rates rise sharply and lending criteria applying to these types of loans tightened considerably to the extent that many banks insist on P&I payments at the end of the interest only period rather than granting an extension.  This leaves the borrower with the option of either refinancing elsewhere which might not be possible or having to make much higher P&I payments which may cause mortgage stress.  This coupled with rising interest rates, falling property prices and/or reduced rental yields means interest only borrowers are caught in a triple pincer movement.

What can you do?  Variable rates are on the move so if you are not planning on selling in the near future, give consideration to switching to a lower fixed rate which then gives you peace of mind and budget certainty.  Plan ahead.  If your interest only loan is due to expire in the next 12 months, contact us now to evaluate your options.  Lending criteria is only going to become stricter so beat the banks to the punch by restructuring your loan sooner rather than later.  With property prices falling around the country, it is in your best interests to switch your loan to a P&I basis as soon as possible.  Equity in your property improves by either the value of your property going up and/or the balance of your loan coming down.  Property prices are softening so stem the bleeding in equity by paying your loan off and be rewarded with a cheaper interest rate.

We’re here to help, so please contact us with any queries you may have by calling us on 63802377 or email stephen@gommfinance.com.au

 

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