Interest-only or P&I?

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.

We have found many of Australia’s lenders started to change their interest-only pricing and policies.

Some lenders actually increase rates on these products by as much as 35 basis points.  Other lenders have indicated that Interest Only loans will only be considered with a compelling case.

What do these changes mean for home owners and investors alike?

Before we explore that question, let’s explore the the difference between interest-only and principal and interest loans.

Interest-only

You only pay interest charged on an interest-only home.  During the interest-only period, there is no contribution to pay down the principal debt at all.

Most lenders allow interest-only borrowing 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).

An interest-only loan improves your cash flow position because you are only required to pay the interest portion (which is always less than Principle + Interest)

Investors may request this option as it it not advantageous to pay down their mortgage debt – interest charges are used as 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.

Owner-occupiers, where possible should be working to pay off principal and interest. The faster you pay off your home loan, the faster you build up equity in your home – Equity is useful for home upgrade, investing or cash out for renovations personal use

For most Investors, interest-only loans are the preferred type of lending.

How will the changes impact you?

Whether you have a loan for your own home, considering making changes to existing investment loans or looking to buy an investment property in the future, you may be wondering how the recent news regarding interest-only loans will affect you.

Your Mortgage Broker George Cremona can talk you through your options and help you find the right loan and lender for your needs – Interest Only or Principle and interest.

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Tags: BuyersBuying PropertyHome Loan TipsInterest Only LoanMortgage ChoiceMortgage Broker

Posted in: Property investment

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