Q. I have an investment loan that I am currently paying interest only on. I have been hearing that the Government is looking to make changes on Interest Only loans. Given I already have the loan in place what changes will apply to my loan?
A. You are correct, there are important changes being introduced that will impact those who have or are looking to have an interest only loan. In March this year, the Australian Prudential Regulation Authority (APRA) notified all banks of the expectation for them to tighten their lending practices, particularly on interest-only and investor residential property loans.
Currently, based on data from the RBA, it is estimated that 40% of all residential property loans are Interest Only (IO), with 64% of these being for investment properties. APRA has set a regulatory goal to reduce the overall share of IO loans by banks to 25% of their residential lending book by the end of this year. That is 15% of all current loans will need to migrate from I/O to principal and interest (P and I) in the next 5 months.
What this means, is that it will be more difficult for customers to find an available interest only loans as fewer institutions will be offering the facility. IO loans may become more expensive (i.e. interest rates may be increased) as there is less availability or competition for them.
Essentially, lending institutions will be encouraging customers that can service “P and I” payments to do so.
In terms of customers who have an existing interest only loan in place, there will be several options to consider depending upon many factors including, your financial circumstances, other investments and debts, and your appetite for risk.
If you are currently servicing an IO loan and you may not be in a position to afford to service the same loan on a “P and I” basis, you need to be considering your options now.
The most obvious options for consideration include:
– Refinancing your loan with another institution
– Take a new loan which includes Principal and Interest payments
– Look to sell assets, clear your debts and restructure your portfolio
If you can afford to revert your loan to “P and I”, you still need to be addressing this issue now. Most likely lending institutions will offer preferential rates for “P and I” loans, especially for owner occupiers. Shop around on the basis of loan features and loan costs but please be mindful of the rapidly changing availability of loan finance and potential future headwinds.
Of course, each option needs to be considered carefully and I would recommend seeking professional advice as to which will provide you with the optimal financial outcome.