Government regulations introduced in 2017 mean interest-only loans are on the decline. Given the changes, it may be time to reconsider your own loan structure.<\/p>\n\n\n\n
Rewind a few years and many people would have confidently\nassured you that an interest-only loan \u2013 a home loan on which you only have to\nmake interest payments for a set period of time \u2013 was the way to go. Its\nbenefits were clear to many owner-occupiers and investors.<\/p>\n\n\n\n
For those buying their first home, for instance, it provided\nan opportunity to get on top of the initial costs of buying a place before they\nwere hit with the full force of principal and interest (P&I) repayments.\nFor those investing in property, it was a great chance to get a tax break,\nwithout tying up all their funds in the one asset.<\/p>\n\n\n\n
Interest-only on the wane<\/p>\n\n\n\n
In early 2017, however, the Australian Prudential Regulation\nAuthority (APRA) put a cap on the number of interest-only home loans banks\ncould offer, down to 30% of all new mortgage lending. As a result, competition\nintensified and interest-only rates jumped well past P&I rates.<\/p>\n\n\n\n
Since then, far fewer people have taken up interest-only\nloans while a growing number have made the switch to P&I mortgages \u2013\nwhether or not their interest-only period had officially ended.<\/p>\n\n\n\n
As a result, the stock of interest-only loans in total\nhousing credit declined noticeably over the past year, from close to 40 per\ncent of all loans to almost 30 per cent. This represented a $75 billion\nreduction in interest-only loans from about $600 billion in late 20162.<\/p>\n\n\n\n
Just recently, APRA removed this cap but there has been no\nmove by lenders to either reduce the interest rate for Interest Only loans or\nchange their attitude towards Interest Only loans so the position has not\nchanged. <\/p>\n\n\n\n
Doing the sums<\/p>\n\n\n\n
It\u2019s not surprising that a significant portion of the\nAustralian population has swapped from interest-only loans given the interest\nrate differential. But it\u2019s not the only reason to rethink your options.<\/p>\n\n\n\n
In fact there are a number of reasons to rethink your\ninterest-only loan, once you sit down and do the sums.<\/p>\n\n\n\n
Your total interest bill. It\u2019s worth considering the\ninterest you\u2019ll pay over the life of the loan. The longer you wait to chip away\nat that principal, the more interest you\u2019ll be paying in the long run. For\ninstance, a $450,000 loan over 25 years with an interest rate of 5 per cent\ncould see you paying an extra $36,055 in interest if you took out an\ninterest-only loan for the first five years.<\/p>\n\n\n\n
Go for low. Today\u2019s interest rates are very low \u2013 for now.\nWhy not take the opportunity to reduce your mortgage before it\u2019s hit by higher\nrates?<\/p>\n\n\n\n
Build equity. If the housing market takes a dip, you risk\nbeing left with little to no equity in your home. That leaves you vulnerable to\nlosing your family home.<\/p>\n\n\n\n
Know your budget. Can you afford your repayments over the\nlong term? Inevitably the interest-only period will end and you\u2019ll be faced\nwith paying the principal and interest. Plus, with less time to pay it off,\nyour repayments are likely to be quite a bit higher.<\/p>\n\n\n\n
Save today. It may be that you\u2019ve got used to having the\nadditional cash, spending it on a mix of day-to-day necessities and luxuries\ninstead of investing it or paying down debt. That might leave you ill-equipped\nto handle higher repayments and worse off in the long run.<\/p>\n\n\n\n
Avoid a fire sale. Come 2020, about two-thirds of\ninterest-only loans are due to expire. While the Reserve Bank of Australia\nplays down the effect this will have on Australia\u2019s economy, it does\nacknowledge that some of these borrowers may experience genuine difficulties in\nmeeting their higher repayments and as a result will be forced to sell. That\u2019s\nnot a situation any owner-occupier wants to be in \u2013 especially as a good number\nof other people will be forced to sell at the same time.<\/p>\n\n\n\n
We are helping a lot of clients find a solution to this now.\nThey are finding that the Principal & Interest repayments over the\nremaining term of their existing loan are higher than they are comfortable with\nso are refinancing to a new lender and paying the Principal & Interest\nrepayments over a 30 year term. Call on 0414818741 if you would like to know\nmore. <\/p>\n","protected":false},"excerpt":{"rendered":"
Government regulations introduced in 2017 mean interest-only loans are on the decline. Given the changes, it may be time to reconsider your own loan structure. Rewind a few years and many people would have confidently assured you that an interest-only loan \u2013 a home loan on which you only have to make interest payments for […]<\/p>\n","protected":false},"author":1,"featured_media":2641,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[110],"tags":[],"class_list":{"0":"post-3984","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-home-loans","8":"entry"},"yoast_head":"\n