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Interest Only Vs Principal & Interest repayments: Home Loan Review Case Study

Interest Only Vs PrincipalNot sure what’s the point of a home loan review?

Here’s an example of what we recently discovered as part of the home loan review we conducted for experienced property investors.

These investors had multiple loans with one lender and one of their Interest Only loans had an Interest Only term that was due to expire. These clients asked us to conduct a review of their loans because they wanted to know how their existing loans compared to what else was available.  Having chosen Interest Only repayments for a long time, these clients were also keen to understand how the recent changes to the lending environment affected their borrowing options going forward.

Here are the specifics…

Current situation– Loans with Lender A

Approx. Loan Balance Current Interest Rate Type Current Loan Type Repayment Type Current Rate (p.a) Monthly repayment
$336,000 Variable Investment Interest Only 5.30%  $1,484
$388,000 Variable Investment Interest Only 5.30%  $1,714
$296,000 Variable Investment Interest Only 5.45%  $1,344
$110,000 Variable Investment Interest Only 5.45%  $500
$240,000 Variable Owner Occupied Interest Only 5.03% $1,006
Total repayments per month*  $6,048
Total interest cost per year  $72,576
Total cost per year  $72,576

*Since repayments on just one of the loans was about to convert to Principal & Interest (as a result of the Interest Only term expiring) total monthly repayments were about to increase to $6,600 per month.

And so the challenge was set!

Was there a way to either reduce this or get more value for the $6,600 monthly cost?

We conducted a thorough investigation of all the options and presented the following proposal.

Potential Future Situation: New 30 year loans with Lender B

Approx. Loan Balance Interest Rate Type Loan Type Repayment Type Rate (p.a) Approx. Monthly repayment
$336,000 Fixed 2 years Investment Principal & Interest 3.95%  $1,594
$388,000 Fixed 2 years Investment Principal & Interest 3.95%  $1,841
$296,000 Fixed 2 years Investment Principal & Interest 3.95%  $1,405
$110,000 Fixed 2 years Investment Principal & Interest 3.95%  $522
$240,000 Variable Owner Occupied Principal & Interest 3.95%   $1,139
Total repayments per month  $6,501
Total interest cost per year  $54,115
  Total cost per year  $78,012

Given the above proposal, these clients now have the potential to save approx. $36,000 in interest costs over 2 years – even after we consider refinancing costs.

Plus, since there’s now a principal component to each repayment, by making the suggested loan changes, these clients would also start paying down their loans. Not only does this improve their overall net wealth but it builds up equity that can be used in the future – potentially for another investment property purchase or maybe for that new kitchen.

As part of this home loan review, we identified an opportunity for these borrowers to:

  • Reduce their monthly outgoings
  • Potentially save $36K interest costs over 2 years AND
  • Pay $48K off their loans over 2 years.

Whilst your lending situation is guaranteed to be different from the one described above, you won’t know what savings you’re missing out on until you ask our team to take a look at your home loans.*

We’re here to help.

 


Please note: This example is provided to demonstrate the potential benefits we identified for a specific client with their home loans. Savings were based on true and correct interest rates provided by a specific lender, at the time the review was conducted. We are not suggesting these same benefits are available to you, nor are we recommending a particular loan product or lending structure. This does not in any way constitute credit advice. Each individual has a unique financial situation and therefore any lending solution we may or may not propose is tailored to suit the individual needs of each client. We would need to conduct a Preliminary Assessment before we can recommend any particular loans or borrowing structure or provide credit advice of any kind. MO’R Mortgage Options is a Corporate Credit Representative (Credit Representative Number 487437) of BLSSA Pty Ltd (Australian Credit Licence Number 391237).

 

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