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The Interest Only Party Is Over – Time To Pay Down Your Mortgage

The interest only party is over – time to pay down your mortgage

As you would have probably heard, APRA, the Australian banking regulator, has given notice to all lenders that they want to rein in the proportion of “risky” interest only loans. On the 31st of March APRA introduced a new cap on interest only loans to be a maximum of 30% of all residential mortgages originated by each bank. At the time of publication, most banks were closer to 40%….

In light of these changes banks are having to make key changes to their interest rates and credit policy to lower borrower’s appetite for such products, and reduce their proportion of interest only loans written. See below for some of the more recent changes:

ANZ

  • Maximum LVR of 80% for interest only owner occupied and investment lending
  • Maximum initial interest only term of 5 years for owner occupied and investment lending
    • Can be extended through a credit critical assessment

CBA

  • Maximum LVR of 80% for interest only owner occupied and investment lending
  • Reduced discounts (higher rates) for interest only owner occupied and investment lending
  • Removal of refinance rebate for owner occupied interest only lending
  • Removal of interest only availability after completion of constructions loans

St George and Westpac

  • Maximum LVR of 90% for interest only owner occupied and investment lending
  • Reduced discounts (higher rates) for interest only owner occupied and investment lending
  • Increase in fixed rates for interest only investment lending
  • Removal of interest only availability after completion of constructions loans

NAB

  • Maximum LVR of 80% for interest only owner occupied and investment lending
  • Maximum LVR for construction loans now 90%

It is important to understand these changes as we expect further disincentives for investors in coming months and years, including higher ongoing increases in investment and interest only rates.

Depending on each individual’s circumstances and longer term strategy, we are currently encouraging clients to proceed with principal and interest repayments (P&I) as the rates are significantly lower and we therefore recognise this as a form of contribution by the banks towards your home loan. An example to explain this is as follows:

On a $1m investment loan, if you were making interest only (IO) repayments at an approximate variable rate of 4.75%, your monthly repayment would be $3,958 (all of which is interest expense).

In comparison, if you were to take advantage of our 3.94% 3-year principal and interest (P&I) fixed rate that we are currently securing with a major bank, your monthly repayment would be $4,739 ($781 higher than the interest only option) however due to the significantly lower interest rate, only $3,283 of this repayment is interest expense and the remaining $1,456 is contributing to principal reduction.

In short, with P&I repayments, your monthly repayment is higher by $781 per month (being $4,739 – $3,858) but you are paying off your loan by $1,456 per month – the other $675 ($1,456 – $781) is being contributed by the bank by them offering significantly discounted rate for the P&I option.

If you currently have an owner occupied or investment loan on interest only repayments, now could be great opportunity to convert it to principal and interest and save significant interest expense. We are still in a low rate environment, and paying down debt should be a high priority while rates are still relatively cheap.

We expect tough lending conditions to continue into the foreseeable future and until the regulators are happy that the property market is in a more stable condition. Borrowers will take time to adjust to the new landscape while they find their feet with new lending policies and interest rates – this transition may take another 12-18 months until they are accustomed to the new environment.

We want to assure you, the banks most definitely still have an appetite for new business, however they are being more selective with their approvals.

As a mortgage broker, we believe our value proposition to our clients is stronger than ever. With the borrowing landscape becoming increasingly complex, it is extremely important to have an experienced and qualified broker on your side.

Get in touch with your lending specialist today to make sure you are on the right track.

Max Harris

Azura Financial

0450 212 049

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