Sep 13, 2017  | Tags: Interest-Only Loan, property investment, mortgage broker

Our Insights...

Interest-only (IO) loans have been the go-to loan for property investors, in particular. But lately, interest-only loans have been playing hard-to-get.

And it's all because of a change in approach from the banks.

Who Would Want an Interest-Only Loan?

An interest-only loan is one in which the borrower only pays the interest for their loan over a set amount of time. They don’t put any money towards the loan amount itself.

This arrangement holds out several appealing short-term benefits.

For one thing, interest-only loans come with major tax breaks.

Then there’s the fact that making interest payments are much smaller than paying towards both interest and principal each month. That would free up more of your income for investing, making home improvements and the like.

Interest-only loans are the best friends of investors who can expertly navigate property market waters.

An IO loan also sounds like a great deal for those who can’t afford a traditional loan, at the moment. The idea is that you pay less now, but pay back the capital later when you're in a stronger financial position.

But things don’t always go according to plan.

The Problem With Interest-Only Loans

If you aren’t making payments towards your loan capital, you don’t have any control over equity growth. It all depends on a favourable economy raising the value of your property.

And you might not be able to control that.

You could wind up with a debt on your hands that’s heavier than the value of your home.

An IO loan eventually reverts to a Principal-and-Interest one after a set amount of time. It should in no way be viewed as an economical way to avoid a P&I loan. If you can’t afford to be paying both principal and interest now, are you really sure you can afford to pay it all later?

Some borrowers have leaped a little too eagerly at the chance to snag an IO loan without thinking far enough down the road. 

What’s more, sudden hikes in interest rates could have IO loan holders paying more each month than expected.

What Banks Are Doing and How it Affects You

As of August 2017, banks started changing their loan requirements. This move is in line with pressure from the Australian Prudential and Regulation Authority (APRA). 

All banks are now required to limit IO loans to only 30% of all new loans they offer. In this way, they can avoid flooding the market with failed investing attempts that would only increase national debt. 

Some big banks already enforcing the new limitation include:

• Westpac
• AMP
• Citigroup
• Commonwealth Bank of Australia

To apply for an IO loan, you would have to meet much stricter criteria than before.

So this new trend regarding interest-only loans isn’t all bad news. It’s actually just another way the economy is keeping itself in balance.

And these tighter regulations could keep you from financial disaster. 

Think carefully before applying for an interest-only loan, and get the right advice. 

Calder Finance Broking provides specialist lending advice, and searches the finance market for the best possible loan deal for you. Contact us on 08 8373 3333.

Written and supplied by Cliff O’Connell of Calder Finance Broking. For more information, please visit the Calder Finance website. Please note that Calder Finance Broking Pty Ltd is a Corporate Credit Representative of BLSSA Pty Ltd ABN 69 117 651 760 ACL 39123