Over the past decade interest-only (i/o) loans have been easily available so much so that they have been perceived to have been a stimulant of the property spike.
However, because of the changes from APRA, about $60 billion of interest-only loans written at the peak of the property boom will reset at higher rates in the next few years and thousands of borrowers may suffer a possible crunch. Monthly repayments on a $1 million mortgage could increase by over 50% as borrowers repay their principal, stretch their budgets and increase their financial distress.
The demand for i/o loans has declined by 20% over the past year partly because of the higher rates and banks giving it only if you can justify it. The big banks offer i/o loans with rates higher by around 0.5% than principal and interest loans. I/o loans may be helpful with your cashflow but there are disadvantages in the long run.
For example, the borrower will pay $61,653 more over a 30-year i/o loan. The i/o borrower not only has to pay higher interest rates, she also has to pay the principal at a higher rate. After about five years, the borrower has to pay for the principal worth 30 years over a 25-year period only. The banks may give out only 30% of new i/o loans but it seems that they have given only around 12% of i/o loans among all new mortgages.
But there may be occasions when interest-only loans are suitable not only for investors but also for owner occupiers. One such case is when the borrower anticipates a better cash flow in the future. The banks still give interest loans as long as you prove to them that i/o would be better for you.
If you would like to discuss your lending situation with me – particularly on what a P&I or i/o loan means for you, please feel free to contact me on 1300 30 67 67.
*of course I am negotiating better rates than this for my clients (I recently got 3.59 per cent). But the spread is still the same.
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