On the 31st March 2017, the Australian Prudential Regulation Authority (APRA) wrote to all authorised deposit taking institutions (ADIs) advising that in order to reinforce sound residential lending practices, that APRA expects ADIs to limit new interest only lending to 30% of new residential lending. Since that advice from APRA, in order to moderate demand, the majority of banks have increased the interest rates applied to interest only loans for both home and investments loans. With these new higher interest only interest rates, now may be a good time to review whether an interest only loan is continuing to meet your needs and objectives. Scenario for consideration : As an example, Mr. & Mrs. Smith borrow $500,000 to purchase an investment property, the loan is structured as a investment loan, with a interest only rate of 5.45% during the initial interest only term of 5 years, the clients will therefore have monthly interest only repayments of $2,270. In comparison, Mr. & Mrs. Jones borrow $500,000 to purchase an investment property, however they structure the investment loan as a principal and interest loan with a 30 year repayment period. With a interest rate of 4.94%, they will have monthly loan repayments of $2,665.00. While these loan repayments are $394 per month more than the Smith’s interest only repayments, the Jones are reducing or amortising their investment loan by $607 per month. This amortisation of $607 is made up of a principal reduction of amount of $394 per month as well as a saving arising from the lower interest rate of some $212 per month. It can be useful for Mr. & Mrs. Smith to understand how much extra they end up paying in total interest over … Continue reading Interest only lending : does it still meet your goals?