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The recent regulatory changes in the lending space has meant some of the following changes:

  1. High Assessment Rate: Most bank lenders are now assessing borrowers at 7.25% Principal & Interest (P&I) repayments. Whilst you may still be paying 3.xx% to 5.xx% interest rate, depending on the lender, the borrowings may will still be assessed at 7.25% P&I repayments for your existing and new borrowing
  2. Owner Occupied vs. Investment Debt: Interest rates between owner occupied and investment debt are different. As logic says it, you pay a higher interest rate on investment borrowing.
  3. Interest Only versus Principal & Interest Repayments: Most banks now require you to borrow less than or equal to 80% Loan to Value Ratio (LVR) to allow Interest Only (IO) repayments on your loan. For borrowings over 80% LVR, you will be required to pay P&I

However, is the Interest Only re-payment still worth it?

Case Study: Rising Interest Rates – Ron & Miranda’s Scenario

Ron & Miranda, own an investment property with a loan of $448,000.

When they purchased the property, their terms were

  • 90% Loan to Value Ratio (inclusive of Lenders Mortgage Insurance)
  • Interest Only for 5 years, thence 25 years Principal & Interest
  • When signing loan documents, a variable interest rate of 5.15%, was received, i.e. Interest Only monthly repayments of $1,923 per month

The reason Ron & Miranda chose to do Interest Only repayments is to maintain the tax deductibility of their $448,000 borrowing on the investment property and focus on paying down their owner-occupied property (non-tax-deductible debt).

Recent Regulatory Changes Impacting I/O Loans: With the recent regulatory changes, the banks are required to limit their Interest Only loans book to 30% of their new lending. This has resulted in loading being applied to Interest Only loan rates and little or no rates discounts being made available to borrowers.

Ron & Miranda’s variable Interest Only rate has just gone up to 5.5% on the back of the recent changes. This means a re-payment of $2,054 which is $131 greater than when they originally signed up the property.

Ron & Miranda realise, the Principal & Interest fixed rate on offer is 4.2%, i.e. Principal & Interest repayments of $2,191.

Interest Repayments on 5.5% = $2,054

Interest Repayments on 4.2% = $1,568

Hence, the 5.5% interest rate has $468 additional interest payable. On this basis, Ron & Miranda whilst paying $2,191, will be bringing down their loan amount by $623 and compounding.

The principal repayments on the home loan is reverse compounding i.e. every month the interest is only calculated on what is owing at the time and a greater principal reduction happens with a lesser interest portion being paid every month.

Ron & Miranda like many of our clients chose to fix their rate for 2 years. A new strategy beyond the 2 years will need to be considered. However the number speak for themselves.

If you’d like to work with savvy mortgage brokers to correctly structure your home loans, get in touch with Sana & Mona Ali on 1300 97 60 60 or [email protected]

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