Changes to Investment Loans
Important information regarding interest only investment property loans
We have seen over the last 2-3 months regular out of cycle interest rate increases on variable rate investment property loans where repayments are being made on an interest only basis.
These changes are being implemented largely across the board by both major and minor banks, as well as credit unions and building societies. The changes have been as high as 0.80% pa.
At the same time, banks have been reducing interest rates slightly in loans with principal and interest repayment terms.
Why is this happening?
The Australian Prudential Regulatory Authority (APRA) has imposed a limit on regulated lenders, such as banks, building societies and credit unions. They have decreed that a maximum 30% of any loan book can be dedicated to interest only lending.
What does this mean for you?
If you have a variable rate interest only investment loan, home loan or line of credit the chances are high that you have already been affected or are about to be affected by these changes. Resultant higher interest costs will be imposed and this may affect the profitability of your property holding and/or your cashflow.
For fixed rate borrowers, there is a real chance that when your Fixed Rate expires, you will be coming off a Fixed Rate to a higher prevailing rate as a result of these changes and this will also likely impact on your profitability and cash flow.
In numbers terms, on a new $300,000 investment property loan, considering the Big 4 banks plus St George and Suncorp the average difference between principal and interest vs interest only rates is 0.24%, with the spread ranging from 0%-0.56%
So what can you do about it?
You can act on it!
- Staying on an interest only rate, but converting to fixed rates could see you saving as much as 1.27% per annum
- Staying on a variable rate interest only product, but refinancing could see you saving as much as 1.57% per annum
- Even staying with the same bank and converting to principal and interest could save you 0.56% per annum.
At the end of the day, this is your money and your profit being affected. Your loan is a mere commodity; your lender is merely a provider. Your broker is here to help find you the best possible loan to suit your needs at any given time.
Rod Cross is principal and small business lending specialist at Regional Finance Solutions Coffs Harbour. He has twenty years lending experience, holds a degree in Business Management and Finance and is a member of CAFBA and the FBAA. For more information or a consultation regarding your lending needs, Rod can be reached on 0437 124 936