Interest Only loans – more strategy required to stay ahead

Do you have one or more Interest Only loans?

Are any of your Interest Only loans rolling over to P&I repayments soon?

Are you concerned about your cash flow when your Interest Only loans rollover to Principal & Interest?

If you answered YES to any of these, it's important for you to know what is going on in the lending industry...

Quick Background

Over recent years, there has been strong price growth across some major centers during a long period of low rates.  These conditions fueled a lot of investment lending, especially Interest Only investment loans.  In measures to control housing affordability and to reduce household debt, the Government (via the Australian Prudential Regulatory Authority) has been gradually introducing more rules to lenders to limit how much they can lend.  This has meant lenders have had to introduce mechanisms to ensure they comply.

Main Changes

• Rates on investment loans are higher than for owner occupied loans
• Rates on Interest Only loans are higher than for loans with Principal and Interest repayments
• Banks have tightened their lending rules, especially in how they treat repayments on existing loans held by borrowers (eg, they analyse remaining loan term more closely and they add high interest rate buffers)
• Banks are being more thorough in how they review existing clients who want to extend their Interest Only period.  In the past, a simple phone call to a bank may have been enough to extend your Interest Only period, however, we are getting more clients call us who are hitting hurdles with this request.

These changes have already had an impact as lenders report a fall in investor and interest only lending, however, all of us are wondering how our household budgets will be impacted.

What to do?

Vision is at the frontline of understanding these changes and the options our clients may have.

We will always do everything possible to ensure we maneuver you through any changes to the credit environment.  It is an important time to stay informed and ensure you understand how your family cash flow may be impacted by these changes.  If you have Interest Only loans and want to know how this will impact your cash flow, please call us on 1800 004 663 for a review or contact us here.

Blog article written by David Lennox, Partner

If this article interests you...you might like to read more about APRA