How times have changed for residential property loans!
Two options to choose from for home or investment property loans are:
- Principal-and-interest, or
Up until recent times, we would generally recommend property loans were set up as:
- Interest-only, and
- The principal component that that would have been paid off the loan – if it was on a principal-and-interest basis – was paid into your offset account instead.
This was and still is a good strategy for many, as it enables:
- The same savings on interest, as principal-and-interest repayments
- Greater financial flexibility to be able to access the principal component from your offset account at a moment’s notice and without needing ‘permission’ from your lender.
- Maximum tax deductibility of your loan if it is an investment property, or could become an investment property in future.
However, lenders – with pressure from the government worried about escalating property prices and the ability of borrowers to repay loans – now typically have a higher interest rate for interest-only loans versus principal-and-interest loans.
This difference between rates ranges widely from 0.1% – 1.4% p.a., depending on factors such as whom the lender is, when the loan was set up and whether it’s a home or investment property loan.
As such, its possible you could save $1,000’s on interest costs each year by switching from interest-only to principal-and-interest for your loans.
In considering such a switch, its important to be aware:
- Your total repayment is likely to be higher with the principal component of principal-and interest repayments. This could mean your repayments would be 30-40% higher than an equivalent interest-only loan,
- Lenders may not allow you to easily switch back to interest-only repayments later on, and
- The possible reduction in tax deductibility and financial flexibility mentioned above.
If this is of interest to explore further, please contact us. The Doctors Wealth mortgage broker can then confirm:
- The interest savings you may be able to make,
- What the difference in repayments would be,
- Answer any other questions you have,
- Review whether your current lender is still the most competitive for you, and
- Make any requested changes as easy as possible for you.