At the end of March, the industry regulator, the Australian Prudential Regulation Authority (APRA), wrote to Australia's lenders to ask them to limit their level of interest-only lending to 30% of all new residential home loans.
As a result, many of Australia's lenders started to tweak their interest-only pricing and policies.
Some lenders actually lifted the interest rates on these products by as much as 35 basis points, while other lenders made it clear that they would no longer give owner-occupiers interest-only loans without good reason.
So what do all these changes mean for both owner-occupiers and investors?
Before we answer that question, it might be prudent to first describe the difference between interest-only and principal and interest loans.
As the name suggests, with an interest-only home loan, you pay only the interest charged on the loan. In other words, throughout the entire interest-only period, you do not pay down the principal debt at all.
Generally speaking, most lenders will only allow you to have an interest-only loan for a certain period of time (up to 5 years). After that time, you can either switch to a principal and interest home loan or commit to another interest-only period (depending on your situation and lender).
With an interest-only loan, your regular repayments are reduced (because you are paying only the interest charged on your home loan debt). As such, this type of loan often proves very popular with first time buyers and other owner-occupiers who wish to keep their regular mortgage repayments as low as possible.
This type of loan is also very popular with investors because they do not necessarily want to pay down their mortgage debtb so as to maximise their tax deductions.
Principal and Interest
With a principal and interest loan, your repayments are divided up into two portions. Some is used to pay off the interest due on your outstanding loan amount, while the remainder goes towards paying off the outstanding loan amount itself.
For owner-occupiers, it's often preferable to have a principal and interest product, where possible. The sooner you start paying off your principal mortgage debt, the faster you will build up equity in your home - which can become incredibly useful down the track.
For investors however, the story is a little different. In most cases, interest-only loans are the preferred loan type for this sort of borrower.
How will the changes impact you?
Regardless of whether you are a property investor with an interest-only home loan, or you have been thinking about buying an investment property in the not-too-distant future, you may be wondering how the recent spate of changes to interest-only loans will affect you.
The good news is, it shouldn't affect you adversely. While some lenders have made some significant changes to their interest-only pricing and policy, others are more than happy to offer this type of product.
Your Mortgage Broker can talk you through your options and help you find the right loan and lender for your needs.