Demise of in­ter­est only loans Raj Lad­her

Monthly Chronicle - - Business & Personal Finance -

In­ter­est only loans are where you merely pay back the in­ter­est of a loan to the lender – so if you bor­rowed $500,000 and made re­pay­ments for five years, your bal­ance would still be $500,000. They are de­signed pre­dom­i­nantly for in­vestors for cash flow and tax de­ductibil­ity pur­poses.

In March 2017, the Aus­tralian Pru­den­tial Reg­u­la­tion Au­thor­ity (APRA) put a re­stric­tion of 30% of all new res­i­den­tial in­ter­est only loans ac­cepted by the banks. The cap was placed to pre­vent bor­row­ers over-lever­ag­ing them­selves along with be­ing pru­dent in a volatile prop­erty market Aus­tralia-wide.

In or­der to con­trol the de­mand for in­ter­est only lending, banks ap­plied two levers - in­ter­est rates and Loan to Value Ra­tios (LVR).

In­ter­est only lending is now any­where from 0.25% to 1.00% higher in in­ter­est than Prin­ci­pal and In­ter­est rates. This can be quite sig­nif­i­cant on larger loans, i.e. 0.50% on a $500,000 30 year term loan is ap­prox. $150 per month more ex­pen­sive.

Banks also now have max­i­mum LVRs in place for in­ter­est only lending, i.e. most len­ders will only give in­ter­est only loans be­low LVRs of 80%. In­ter­est only loans for owner oc­cu­piers are scarce and bor­row­ers would need a good rea­son for ap­proval such as go­ing on ma­ter­nity leave or home ren­o­va­tions. How­ever even in these cir­cum­stances, in­ter­est only loans will only be given for a short term of say one to two years.

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