finance

Interest-only loans suitable for investors and owner occupiers alike

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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.

If you would like to know more about finance, you can click here to know more about Chan & Naylor services. You can leave your details here and we can schedule you for a free consultation. We’ll contact you to explain more.

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Chan & Naylor Group has nationwide offices in Brisbane and Capalaba in Queensland, Melbourne and Moonee Ponds in Victoria, East Perth in Western Australia, and South West Sydney, Parramatta, Pymble, North Sydney, and Sydney in New South Wales.

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