Many people are intrigued about interest-only loans and for good reason. They can be an excellent way to save money in the short-term, as you only need to pay the interest owed on your loan rather than the principal balance.
The interest-only nature of these loans generally only last for five to ten years, however once this is over, you’ll still need to pay the principal balance.
One of the advantages is that repayments on interest-only loans will tend to be lower than they would be for a regular loan. If you’re an investor, you can usually claim a tax deduction on the interest of your loan, which makes them more appealing.
Interest-only loans have become popular for these reasons, however, recently tougher regulations have come into play and it’s now more difficult to access them.
CHANGES TO INTEREST-ONLY BORROWING
Recently, there have been some changes to interest only borrowing due to some borrowers having been unable to meet their loan repayments once they have moved onto principal and interest payments. In many instances, this isn’t a case of the borrower being disorganised, it is that they had no idea their repayment amount would change. A recent report released by financial services company UBS revealed that a third of interest-only borrowers were unaware they even had this type of loan arrangement.
The initial money-saving aspect of interest-only loans can also attract people who wouldn’t ordinarily be able to take out a loan. They can battle with the repayments, despite understanding their loan terms and conditions.
Another concern about interest-only loans is that they are reliant on property prices rising, rather than stagnating or falling. In the instance that prices fall, as a borrower with an interest-only loan, your property (for which you have to pay for in its entirety) may end up being less valuable than your loan.
WHICH BANKS HAVE CLAMPED DOWN ON INTEREST-ONLY-LOANS?
These are some of the reasons why many of the country’s banks (including the four majors) have made it more difficult for borrowers to access interest-only loans. APRA, the Australian Prudential Regulation Authority, led the charge by capping any new interest-only lending at 30%, meaning that banks will need to be more discretionary in who they approve for such facilities.
While these latest restrictions can make it harder to get an interest-only loan, it doesn’t mean that it has become impossible and just means you have to approach the right lender for your circumstances.
HOW TO GET AN INTEREST ONLY LOAN
With the help of professional advisers and by weighing up the pros and cons, you’ll be able to determine what type of loan you would like to apply for. The research will come in handy when it comes to talking to the lender as they will want to know why you’re applying for an interest-only loan and whether you understand its conditions. Because they can’t offer as many of these types of loans as before, you’ll be giving yourself an edge over other borrowers if you show you’ve done your homework.
A bigger deposit will also give you an advantage. The lower the loan-to-value ratio (LVR), the more likely you will be approved for an interest-only loan. You may also want to look beyond the normal major banks to find a lender who is less restricted in terms of interest-only lending.
You stand a better chance of securing an interest-only loan if you work with a mortgage broker. We will step you through the process, discussing your needs and answering any questions you may have so that you can feel confident and proactive in the important decision-making process.
For further information on interest-only loans, please contact your local Loan Market Mortgage Broker on 135626 or refer to our website loanmarket.com.au.