Interest-only loans are designed to delay the repayment of the loan principal for a fixed term, usually up to five years, are the focus by financial regulators, including the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA).
Recent increases in interest rates on interest only loans, including line of credit products with some institutions by as much as 60 basis points, have impacted investor cash flow, and the expiration of fixed terms is encouraging many to consider switching to principal-and-interest repayments.
“Interest Only Debt Clock” issues
- Is that some borrowers switching from fixed terms or expiry of the interest only period might not be able to service higher repayments, or meet lenders’ serviceability thresholds, which usually range from 7% to 7.25%.
- In prior years you could generally call the lender at the time the interest rate was due to roll over but toady if you wish to maintain interest only after the initial expiry period most lenders are forcing borrowers to complete a full lending assessment and they may fail as a result as the servicing thresholds as in item 1.
If you are forced to make principal and interest repayments the cash flow impact could be significant. All investors should consider including a strategy to pay down debt over time and not rely solely on interest only facilities. Restructuring to a lower rate of interest may allow you to subsidise principal and interest repayments. Contact us now for a free strategy session: Strategy Session
Research suggests a “large proportion” of interest-only loans are set to expire between 2018 and 2022 and some borrowers will not be able to meet “more conservative” lending standards that are here to stay for the foreseeable future.
When completing finance strategy reviews we advise borrowers to plan and consider their future cash flows. All clients must include a debt reduction strategy to their investing plans. Renovations and development can assist by generating larger profits, quicker.