GUEST POST: Is it time to change your interest-only investment loan to principal & interest?

With the major banks raising rates and tightening loan conditions, you may be questioning the advantages of interest-only loans. Today we have asked our friends at Mortgage Choice Toowoomba to discuss the new rules and how they may affect your loan.

The Government banking regulator Australian Prudential Regulation Authority (APRA), recently introduced new rules to limit ‘interest-only investment’ lending to 30% of new mortgages. The banks response to this requirement was to increase rates on their interest-only loans to reduce new demand and encourage existing investors to shift to principal and interest (P&I) investment loans.

Many banks have increased their interest-only rates by up to 0.40% whilst also reducing rates on P&I loans, as a result there can be up to 0.60% difference between the two loans.

This is changing the game in investment lending.

In the past, interest-only loans have been the loan of choice for many investors, in order to maximise negative gearing and lower loan repayments (as the repayments don’t include paying off the principal loan amount). However, because of these recent changes in interest rates, the repayments on P&I and IO loans may now be very similar (see table below).

rates

The most important thing to remember is that principal and interest loans have the advantage that they will also pay down your debt.

It’s crucial for all investors with interest-only loans to consider their portfolio and seek advice to find out which loan structure is now their best choice. There is no hard and fast rule on whether switching to a principal and interest loan will be right for you, as your circumstances, bank and loan will vary, but you may find some cost savings.

To find out more, we recommend you contact your financial planner or mortgage broker to gain expert advice.

Many thanks to Mortgage Choice Toowoomba for writing this post!

Mortgage Choice Toowoomba gives free, personalised loan advice. To understand all your options in under an hour, call 07 4638 8200 today to book an appointment.

Information on this site may be regarded as general advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice we have given you, having regard to your own objectives, financial situation and needs before acting on it. Where the information relates to a particular financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product.

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