Interest only V's Principle & Interest with Investment Lending?
For years now investors have been educated to have interest only loans on investment while they still have debt on their family home. Obviously paying off tax effective debt while holding non tax effective debt just does not make sence.... Or does it?
So many changes lately in the Australian finance market, APRA, RBA, Aust Govt and most lenders are all on a push to remove or at least lower levels of interest only loans. The theory behind this is; the consumer has become so conditioned on the current historical low rates, they think that this is now the normal. When there is a change in market pricing and rising of rates back to 7%-8%, this would have a massive impact to consumer budgets.
Granted this may be a few years, but think what this would do to your current repayment, it may double!
It is now time to look at lending an other options to safe guard against this?
If we look at a standard $400,000 investment loan at say 4.6% interest only (I/O), the repayment would be $354 per week and the financiers plan is to lift these interest only rates even further.
Now lets look at the same loan as fixed as principle and interest (P&I). Some banks are offering 3.88% Fixed over 2yr for P&I. Now the same $400,000 loan would have a P&I payment of $434 per week. Agreed it is an increase of $80/week or a total of $8,320 in extra repayment over the 2 year period. However the loan balance has now decreased down to $385,344 where under interest only it would still be $400,000. So you may have paid an extra $8,320, but it created equity of $14,656 a net gain of $6,336.
So lets summerise, interest rate is lower today if you select P&I, repayment is higher, but end debt is lower and financial you would be in a position with more options. When interest rates do increase over the next few years, you would have an option to refinance the new lower debt, back over a longer period and cash flows remain similar.
Educated investor are a least watching this and gaining advic