The future of Interest Only Loans
It’s not as easy as it once was to apply for an interest-only loan. Over the last couple of years lending for this type of investment loan has been tightened in an effort to slow the pace of record growth in investment home loans.
Lenders are under pressure by government regulatory bodies to make it ‘less attractive’ to take out interest-only loans, a strategy which is hoped will protect investors and achieve sustainable growth in the home loan market.
Lenders have responded to the crack-down in different ways. Some now ask for larger deposits for investor loans or have scraped discounts they previously offered. Others price loans with principal and interest repayments cheaper than interest only loans. Still others now offer better discounts on owner occupied loans or allow investors to borrow less than owner occupiers.
Which way to turn?
As these changes are not uniform across the industry, but vary from lender to lender, it has been difficult for investors to know which way to turn. We have had many clients come to us worried about whether the changes affect their existing loans or what they should do when they make a change or try to restructure their loan.
As your Lending Specialist, we are in touch with the latest changes occurring in the industry and can seek out the best option to suit your particular needs.
Should you take out an interest-only loan?
Interest-only loans can be a tax-effective way to invest in property, but they are most effective when accompanied by advice and tax planning.
Because the monthly repayments are minimal for a specified amount of time (usually between 1-5 years), it is a method used to free up funds in the short term for other investments, renovations or to pay off non-tax deductible debt like credit cards and car finance.
Saying that, problems can start when the interest only period ends and borrowers who haven’t planned their finances carefully and are unable to pay off the principal amount, along with the interest. If property prices fall and you are forced to sell, you may end up selling for a loss.
The other drawback is that because you are only paying off interest, your original loan amount doesn’t reduce because you are not paying any of it back, which equates to a considerably higher cost over the full term of the loan.
It is important that you seek professional advice. If By Design Financial Solutions can be of assistance, please contact us.
*This information is general in nature and does not take into consideration your individual circumstances. Please contact us for further information.
