June 06, 2017
Over the past year, the Australian regulatory authorities such as ASIC (Australian Securities & Investments Commission) and APRA (Australian Prudential Regulation Authority) have been using their powers to address the growing concern of runaway property prices (especially in Sydney and Melbourne).
One of the primary tactics these authorities have adopted is to get banks and non-bank lenders to reduce the use of interest-only loans for investment property loans. As a result, lenders have had to curb the demand for interest-only loans by increasing the interest rates on these types of loans. In some cases, the gap between owner-occupier and investment loan rates has widened to more than 0.7 per cent (whereas these rates were identical two years ago).
So what does this mean for the average property investor?
Let’s assume that you have to take out a $400,000 investment property loan at an interest rate of 4.0% with Principal & Interest repayments. In the current environment, the bank will most likely charge you an additional 0.5% interest if you want this loan to have Interest-Only repayments. The following table will give you an indicative comparison of 3 loan options in the above scenario.
The most appropriate option that will best suit a property investor’s needs would depend on their individual circumstances.
In many instances, property investors still have an owner-occupied debt to repay.
In this case, using the 3rd option to reduce your investment property loan repayments and directing your cash flow towards paying off your owner-occupied non-deductible debt will make more financial sense.
Or, if you have a high level of income and need to save tax, then the 3rd option of paying the higher interest rate with interest only repayments will help maximise your negative-gearing strategy.
On the other hand, if the tax-deductibility of your property loan is not a major factor in making your decision, then choosing the 1st option with the lower interest rate may be more attractive to you.
What should a property investor do?
Most property investors are contacting their banks and mortgage brokers to look at options of refinancing their existing investment property loans to get a better deal. Despite the increases in interest rates for these loans in recent months, there are still opportunities available for securing a better interest rate.
For example, fixed rates are currently quite attractive – especially for investors who plan to hold onto their investment properties for the next 2-5 years. Or there are lenders who are able to provide lower interest rates on their investment property loans as long as an owner-occupied property is cross-secured against the investment property.
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