In recent times we have seen continued efforts by the Australian Prudential Regulation Authority targeted at lenders, specifically focussed on their approach to investment property lending and interest-only loans. APRA is trying to cool the housing market by preventing investors from over-committing themselves, with stronger limits on Australian lending practices and assessments. This has presented itself in the form of altered servicing calculators, reduction on LVR limits and changes to the way Overseas income is assessed, just to name a few.
This activity has led to Tier 1 and Tier 2 lenders commencing to break away from a one rate fits all philosophy towards a multiple rate philosophy.
What does it all mean? This essentially means that if you’re an investor and wish to pay ‘interest only’ (IO) you will pay a higher interest rate to use the banks money as opposed to an Owner Occupier prepared to pay down their loan with a Principle and interest (P&I) facility.
Many accountants and tax agents have been advocates of the Interest Only facility as it makes assessment of deductable expenses against the asset simpler. Many investors will divest the asset sooner compared to Owner Occupiers and the IO facility assists with managing cash flow as no additional funds are required to provide for the Principle portion of a repayment.
The tightening of APRA’s regulatory framework has resulted in several lenders suspending new Investor loans, providing fewer options to investors.
Many lenders are charging an additional 10-20 basis points to Owner Occupier IO loans whilst Investor IO loans can expect a 40-70 basis point increase. RP Data reports in Sept 2017 that Investors are paying on average 60 basis points more on their mortgage than owner occupiers.
It should be noted that the tightening of lending practices has resulted in a reduction of available product options for Interest only loans. RP Data reports that new originated IO loans made up 30% in June 2017 down from 46% in Jun 2015. Additionally, investor loans have remained below APRA’s recommended 10% of loans originated, consistently since early 2016.
Prudent investors are shopping around to find flexible options hoping to maximise their returns whilst minimising their expenses.
At Launch Money we have the tools to determine if you are better off paying higher interest on an IO facility or whether switching to a P&I facility on a lower rate will work better for you.
The team at Launch Money can save you the time and effort in working through the complexities of the lenders offerings. Simply call our team today and ask for one of our mortgage brokers to assist.
Saving you money and ensuring you are on the best rate for your circumstances is only a call away.
Contact our Mortgage team today on 1300 925 081