Investment Lending & Interest Only Loans
Investment loans have traditionally been set up with payments of interest only. With the view that if you are paying of any existing owner-occupied debt – you would concentrate on reducing your non-deductible debt before reducing any investment debt.
But the platform has changed. APRA – the governing body over banks to ensure we have a very strong banking sector introduced measures to slow down the rates of investment in Australia. Two ways to slow this down was to introduce a higher interest rate on the interest only loans and limit the maximum borrowing for investment to an 80% LVR. You needed 20% deposit plus costs to purchase an investment.
So, most institutions now have a margin on the rate of up to 0.40% higher on investment loans if you are paying interest only payments.
What we need to remember on investment loans is when the bank is calculating your repayment they do so over a 30-year loan term (in most cases). If you opt for an interest only payment plan for 5 years. Then the bank will be calculating the repayments over the remaining 25 years and so on. This starts to chunk on your repayment capacity and it will affect your cash flow when your payment changes over to principal and interest.
Depending on your circumstances it may now be time to consider your options, rates and cash flow when your investment loan comes around for renewal whether you should be looking at P&I payments and attracting the lower rate.
Different banks are now moving in the market place. CBA have announced that they are now moving their maximum LVR on investment to 90%. Which means less deposit to purchase an investment property.
ANZ however have announced it will be regarding all interest-only loan renewals as credit critical event requiring full income verification effective 5 March.
The bank has said the change covers borrowers shifting from P&I to IO repayment type and those extending their IO terms.
It said the new policy applies to any renewal request if the resulting repayment type is IO and either the current repayment type is P&I, or the proposed IO term is greater than the remaining IO term of the existing loan.
A loan must remain or revert to P&I if serviceability is not evident after the bank has done full income verification and serviceability test over the new residual P&I term.
The policy applies to all its home and residential investment loans, said ANZ in the note. Applications submitted to credit assessment before 5 March will be evaluated under the previous policy.
So, if you are considering an investment – time to talk to us to see what is available in the market place.
If you are looking at your existing investment lending and some of your loans are now reaching their interest only term or fixed term interest expiry – again time to talk to us to look at all your options.
Donna-Lee Parkes
0418 903 954