Whether you’re a property investor or someone who has taken out an interest only (IO) loan on your owner-occupied home, the changes introduced by APRA (regulator of the Australian Financial Services Industry) in late 2016 could make you question if an IO loan is STILL the BEST OPTION for you.
Prior to this shift you could get the same interest rate for your investment loan as you could for your owner-occupied home loan, but since APRA has stepped in banks have been increasing interest rates for IO loans. The gap now could be as much as 1% or (100 basis points).
SO, WHAT DOES THAT MEAN FOR YOU???
Well it depends on why you took out the IO loan in the first place. As a property investor you may have taken out the IO loan because your focus at the time was the potential capital growth in the property and not paying down the principal. You may have also wanted the extra funds to pay down any non-taxable debt such as your owner-occupied home loan.
I have outlined below a scenario that highlights the difference in repayment amounts with the increase in an IO interest rate by 1%.
Scenario
- Client has an investment loan of $500,000 and initially took this out as an IO loan so they could free up cash flow to pay down non-taxable debts
- For this scenario let’s assume the initial IO rate was 4.5% at the time the loan was taken out and the new IO rate is 5.5%
- The principal & interest (P&I) rate remains at 4.5%
Repayments at 4.5%
- Initial repayments on the IO loan at 4.5% would have been $1,875pcm
- Compare this to P&I repayments at the same time and you would have been looking at $2,533pcm
- The difference being $658pcm or $7,896 per annum of which could have been considered as additional cash flow to be put on your non-taxable debt (i.e. home loan)
Repayments at 5.5%
- With the increase in IO rates by as much as 1%, this would see the IO repayments jump to $2,291pcm closing the additional cash flow gap to $241pcm or $2,892 per annum
With as much as $5,004 being lost in additional cash flow it’s worth asking yourself, is the IO loan still the best option for what I want to achieve?
If this has got you thinking and you’d like some advice, do not hesitate to contact me.
Disclaimer: Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product. Subject to lenders terms and conditions, fees and charges and eligibility apply.
