How times have changed for residential property loans!

Two options to choose from for home or investment property loans are:

  • Principal-and-interest, or
  • Interest-only

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.