Hi, I have an interest only loan for 840,000 on an investment property worth $1.2M… the rate is 4.85%. I spoke to the bank and they said if it was a principal and interest loan they would reduce it 3.99%. Is there really that much of a difference between interest only and P&I loan?

Hi Ali,

That’s a great question that many home owners wish to understand. The short answer is YES - there is definitely that much difference on owner occupied P+I rates at one end ( usually well
Under 4% ) then a higher rate for owner occupied Interest only loans & often many lenders won’t even provide these loans anymore at all. When we move into investment property loans, you can definitely get lower rates on P+I compared to Interest only.

The reason is because APRA have placed ‘speed limits’ on banks (ADI’s) in regards to the amount of new loans which are interest only. This can only be as much as 30% of total new residential mortgages within their portfolio for loans above 80% LVR.

There is also a restriction of investment property loans to remain below a previously set benchmark of 10% growth.

So there are total restrictions on lending for investment purposes + also separate restrictions on interest only loans. Banks who have exceeded or are dangerously close to these figures will decline or turn away your loan completely. The appetite of each lender can change from quarter to quarter currently.

Just remember that in many instances, interest only loans hold far more risk of the loan not being reduced or even paid back in full. This is seen as a high risk to banks and especially APRA.
In regards to investor strategy, interest only loans are mostly used to allow the principal reduction amount of the investment property to be paid off the owner occupied ( non deductible ) amount first, therefore maximising the proposed tax benefit allowable. If you don’t have any owner occupied debt left, then a P&I loan on the investment property is highly appropriate.

Principle and interest loan repayments however will often be higher in proportion however if your mortgage broker ( or bank ) can obtain a low enough rate, this can work out to be very similar repayments.

Hope this helps, feel free to ask any questions.

Hi Andrew,

A BIG DIFFERENCE ISNT IT?

It’s not until people just like you check back in with the bank to establish that the mortgage market has changed considerably over the past 12 months.

This is reasonably standard at the moment and a HUGE reason why it is worth checking back into your current lender to see what “specials” they may have.

Investment and interest only loans have taken a beating from ASIC & APRA over the past 18 months and most lenders have reacted by moving the price up and tightening credit policy.

Investment
It goes so far as to lenders who write more than. 30% of all new loans as investment, will incur a “please explain from the regulators and in several instances get fined for breaching this. Mind you, there are heaps of lenders that were previously writing NO/ LITTLE investment loans who are appearing with some really competitive offerings. The other side is those lenders who were previously selling loans through financial planners only, where more than 90% of new business we investment, were pretty much forced to STOP writing loans because of it.

Interest only
The regulators started of being concerned about interest only loans on owner occupied loans, because the principal was not being paid down and lenders were at risk of loosing money of the market turned. Yet the review they conducted encompassed investment loans as well. From this review the government “suggested” lenders adopt a tighter policy toward Interest only loans and should discourage this sort of lending. The best way they could do that was to price it so the Interest only repayment was close to or more than the principal and interest repayment. This is why you see many lenders investment, interest only rates significantly higher than a principal and interest repayment.

Hopefully that provides a little context to the situation and enables you to make a more informed decision about what to do with your investment loan that lenders will fall all over themselves for.

Regards

Craig

Hi Ali,

Yes there is a large difference but not by that much.

Most banks will do interest only investment loans for around 4.40%.

Switching to P&I will definitely get you a cheaper rate but for some investors, the increased repayment affects their cashflow.

As such if you don’t want to go to P&I there are better offers out for interest only loans

Feel free to get in contact if you want to talk further.

Kind regards,

Tim Russell
0400 530 868
tim@multipartfinance.com.au