If you haven’t checked your interest rate lately, do it now!
All of a sudden there are a lot of borrowers with interest-only loans, not realising that their rates have just increased by 0.30-0.50%+, and not realising they could get significant discounts now by refinancing, and switching over to Principal and Interest repayments.
Meanwhile the advantages of using interest-only loans are starting to fade… APRA must be delighted.
If you’ve got a variable rate interest-only loan, then chances are your rate has increased somewhere between 0.30-0.50% over the past few months. If your loans are investment, as opposed to owner occupied, then the increase could very well be more.
On $750,000 worth of lending a 0.50% rate increase equates to extra payments of $312 x 12 = $3,744 per year. So not something to be ignored.
It’s in response to regulatory intervention where on 31 March 2017 Australia’s banking regulator (APRA) called for the banks to limit interest-only loans to a maximum of 30% of new flows.
(I covered this in my post “Reality check for anyone getting a home loan this year”, you can read the full article here).
What benefit are you really getting from your interest-only loan?
Fair enough if you’re using the surplus cash flow to pay down other/more expensive debts more quickly, or if you’ve got a home that you’re soon planning to convert to an investment property. But if it’s for no other reason than you prefer the lower repayments. WATCH OUT!
Moving forward it’s going to be difficult to ‘rollover’ your interest-only period when it expires, so you might find yourself having to make higher principal & interest repayments over a shorter period. “Well I’ll just refinance” you might say… sorry, the major banks are no longer accepting interest-only refinances above loan ratio 80% now.
Interest-only vs. P&I – repayment differences
If you lose work or interest rates go up, then it could get ugly… what if your house price falls too and then you can’t sell, but you have to sell? Uglier again.
Previously it was the case that interest-only gave you a bit more flexibility, and given there was no cost disadvantage it was really a no-brainer, particularly for those who had strategy behind it and actually knew what they were doing. But it many cases it may not be worthwhile now, not with the interest rate difference this large, and not with the risk of being unable to rollover the interest only period in years to come.
But don’t despair. Paying down debt, particularly non tax deductible debt, has many advantages. It certainly lowers risk (by forcing savings and creating equity). So to encourage this sort of behaviour we’re now seeing very attractive Principal & Interest rates being offered really by all banks.
How much cheaper are we talking, should I consider refinancing?
I’m talking interest rates around 3.80-3.90% for owner occupiers, and depending on whether or not you prefer fixed or variable, potentially only 10 or so basis points higher for investors.
This compares to interest-only rates which are anywhere from 50 – 100 basis points higher (variable rate interest only investment loans are approximately 4.85-4.95% now for new lending across the majors). It’s really quite astonishing the widening of the gap now.
Throw in $1,000+ refinance rebates, and the ability to unlock some equity at the same time (while you still can!)… all of a sudden Principal & Interest refinances with some form of cash-out are looking more and more attractive. Just what the government ordered…
It’s probably a better time than ever to sort through the lenders and find out who has the best options for you.
Interest-only rates are tipped to increase further, and it’s anyone’s guess how long the cheap Principal & Interest promotional rates will be kept avlie for.
So what rate are you currently paying? Ask yourself… what benefits are you really getting from interest-only, and do they outweigh the higher rate you have to pay now?
If you can secure a much cheaper interest rate, and at the same get some cash-out of your properties with no costs involved… why wouldn’t you?
