With interest rates now around the mid-4% range, and even lower, there’s really no need to have an Interest Only loan, whether you’re an investor or owner-occupier.

Property investors should be fully maximising the current record low interest rates by switching from Interest Only to Principal & Interest loans. And those investors who don’t soon make the move may well find their lender does it for them.

With interest rates now around the mid-4% range, and even lower, there’s really no need to have an Interest Only (IO) loan, whether you’re an investor or owner-occupier. The significant drop in interest rates in the past couple of years means Principal & Interest (P&I) repayments are similar to what IO were.

Take the example of a $300,000 30-year loan. As the table below shows, monthly repayments at 7% (the average variable interest rate in Australia in the past 15 years) at IO are $1750. At 4.5% P&I (a common variable rate) they are $1520.

                                         7%                       6%                      5%                      4.5%

Interest only                 $1750                   $1500                   $1250                   $1125
Principal & Interest       $1995                   $1798                   $1610                   $1520

So you’re paying a couple of hundred of dollars a month less in repayments at the current P&I rates, and starting to pay off some of the principal. If you actually maintained your repayments at $1750, you’d be getting even further ahead.

There is a very strong possibility that lenders will soon look to restrict or reduce the number of IO loans they offer, in response to warnings from the Australian Prudential Regulation Authority (APRA) about the need to slow investor credit growth.  We are now seeing lenders starting to actively raise the bar in terms of the requirements investors have to meet and the restriction of IO loans will probably be one of those moves.

Another option for investors might be to look to pay interest in advance on their investment loan. You will generally receive a slight discount on the interest rate and there may be tax benefits. Property investors would be well advised to work with a quality mortgage adviser to look at their current loan arrangements.This is to ensure they are maximising the opportunities associated with the record low interest rates on offer and managing lenders’ changing requirements.

Source: The Real Estate Conversation