Whilst it has long been a popular strategy for investors, there used to be a strong argument for borrowers to select Interest Only repayments on their owner occupied loans as well.
Making Interest Only repayments on your owner occupier loan provides additional flexibility. It allows you to preserve your debt for future deductibility purposes – which is helpful if you want to rent your home as an investment later on. And, you can still reduce your net debt by building up funds in a linked offset account.
So what’s changed?
Actually, lots.
There have been numerous changes to lending policy in recent months and those relating to Interest Only repayments have been quite significant.
APRA now expects lenders to limit the flow of Interest Only lending to 30% of new residential lending. APRA also wants lenders to limit Interest Only lending on higher Loan to Valuation Ratios (LVRs).
Each lender has a different portion of existing Interest Only loans on their books. In addition, the amount of new Interest Only lending a lender attracts will depend on their current lending policy, targeted campaigns and the type of borrower they normally lend money to (i.e. investors vs owner occupiers).
Accordingly, it makes complete sense for each lender to implement different measures to ensure they stay below the 30% Interest Only limit. Which is exactly what we’ve seen happen lately.
Lenders who attract a higher % of Interest Only borrowers and those currently above the limit (some are reportedly as high as 45%) will need to implement much tougher measures than those well below the cap.
Since the % of new Interest Only loans for a specific lender will rise and fall over the course of a quarter, lenders are constantly monitoring how they’re tracking and making swift policy adjustments accordingly. Similar to the way interest rates are used as a lever to encourage (or discourage) new mortgage business, lending policy is utilised the same way.
Some of the lending policy implemented so far include:
- Increased rates for Interest Only loans – You can expect to pay an additional 0 – 0.25 interest on your loan when you select Interest Only repayments (this varies according to your lender)
- Reducing the maximum Interest Only period
- Restricting the availability of Interest Only repayments to loans where the LVR =< 80%
- Waiving renegotiation fees for borrowers who decide to switch from Interest Only to Principle and Interest repayments (in those cases where renegotiation fees apply)
- Not extending refinance rebates to loans where Interest Only repayments are selected
- Reducing interest rate discounts offered for loans with Interest Only repayments
The landscape is changing constantly, to the extent where lending policies announced even a few weeks ago has since been altered. For example, a lender who had previously closed their door on investment refinances are now accepting them again, but only if the borrower selects Principle & Interest repayments.
Choosing to make Interest Only repayments on your home loan can still provide benefit. But with the additional cost potentially involved, you need to ensure any benefits outweigh the cost.
Which repayment you choose will depend on the lender (and how big the premium is for selecting Interest Only repayments), the size of your loan and your reasons for considering Interest Only repayments in the first place.
Please note this was posted 30 May 2017 and at this time, all material contained herein was correct.
