With Interest-Only (IO) loans, property investors have been able to minimise their mortgage repayments in the short-term, while anticipating that their property would grow in value in the long term.
They expected the property would generate equity without having to pay off any of the principal, as well as being able to direct all “extra” funds to paying off non-deductible debt.
For owner occupied home owners, the cost savings with an IO loan could be significant, helping to ease financial pressure especially for one-income families.
In 2014 APRA tightened standards for IO loans and mortgages generally, by making serviceability assessments more conservative i.e. reducing your borrowing capacity. In 2017 APRA further tightened standards to curb mounting risks from the strong growth of IO loans. Lenders had to limit new IO lending to 30% of new loans and closely manage IO loans that had high loan-to value-ratios (LVRs), which meant that if you had less than a 20% deposit your loan would have to be Principal and Interest (P&I).
As a result of these new regulations, lenders raised interest rates on investor and IO loans. By mid-2017, the average interest rates on variable IO loans increased roughly 40 basis points (0.4%) above P&I loans. Before this, there was no significant interest rate difference between IO and P&I loans.
It is expected that about $120 billion of IO loans will roll over to P&I each year over the next 3 years – a total of $360 billion. On average this means the extra cost per property, per loan will be around $7,000 per year. If you are a property owner struggling with the notion that you will have to fork out an extra $7,000 odd dollars per year per property, what are your options?
You may be able to extend your IO period with your current lender or refinance your IO loan with a different lender, however both options will most likely require a full credit and serviceability assessment. You may be able to refinance to a new P&I loan with a longer loan term, and in doing so reduce your payments. You may even have to consider selling your property/s to repay your loans. Before you do anything, we advise that you give MTM a call or email us to discuss your options.
There is mounting unease out there that this could lead to a ‘fire sale’ as interest-only loans roll into principal plus interest. It doesn’t necessarily have to be you.