Australians have gravitated towards the benefits of interest-only home loans in high numbers in years gone by. But a raft of changes mean it might be a good time to start looking into the principal-and-interest option instead.
In Australia, four out of every ten residential mortgages are interest-only – a pretty high number compared to other countries.
So why have they been so popular here? Well, they can allow you to maximise tax benefits and the amount you borrow, while providing lower repayments when you first start out – which can be great for young families breaking into the property market.
So why should I consider a principal-and-interest loan?
A few things have coincided to change the factors in the interest-only vs principal-and-interest debate, including:
- Regulator APRA has moved to restrict the number of interest-only loans. Earlier this year it instructed lenders to cut interest-only lending to 30% – down from 40% in overall residential mortgages – by tightening certain criteria.
- Interest-only rates are going up in a bid hit that 30% target. In fact, lenders have raised interest-only rates by more than 100 basis points since October 2016.
- Large interest rate hikes are also being tipped by many experts over the next couple years, so it might be wise to make the switch to principal-and-interest soon.
- Lenders are currently waiving fees for people who make the switch to principal-and-interest. But once enough people make the switch they may stop.
- By paying off your principal you’re effectively keeping more of your own money in the equity of your property – not handing it over to the bank.
So what’s the catch?
Obviously interest-only loans are popular in Australia for a reason. By making the switch to principal-and-interest, you may:
- Have restricted cash-flow due to higher monthly repayments which could put a strain on the family budget.
- Have less capacity to branch out into other investment opportunities due to having less cash-flow.
- Miss out on maximising the interest you can claim as a tax deduction because your repayments also go toward the principal, rather than interest-only.
- Find that you actually preferred interest-only. As tighter lending standards are enforced you might find you’re locked out of switching back to interest-only in future.
How do I find out more?
Make no mistake. Choosing between an interest-only or principal-and-interest loan isn’t something to be taken lightly.
In fact, getting it right can save or cost you tens of thousands of dollars down the track.
So come in and have a chat with us and we’ll assess your unique situation. We’ll then crunch the numbers, balance the pros and cons, and help you decide on the option that best suits you.
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