Investors: Are you scared about losing your interest only repayments?
A major problem is looming for those with multiple interest-only loans (usually investment), particularly on high loan to value ratios e.g. borrowed at 95%, when the loans finish the interest-only term which is usually an initial five years. Although we have rarely done any investment loans at this high an LVR, I know the staff of several banks have expressed concern to me about their loan books in this space. We are finding it increasingly difficult, even for those on significant incomes and huge rental returns, to service multiple investment properties. The banks have been forced by APRA to lower the amount of interest-only loans to only 30%. However, they achieved this all too quickly by making it really difficult to service loans over the required 25 year period or less.
NB: You need to be able to service the existing loan over the remaining term of the loan, so if you took an interest only term for 10 years on a 30-year loan, your new repayment could be over as few as 20 years. Click on our repayment calculator (below) or on our website to help you compare loan repayments. If you cannot afford this new repayment, you might need to refinance to extend the loan term back to 30 years or sell the property.
So what to do about it? Here are Five suggestions to help.
- Please ask us to approach your bank on your behalf and see if we can negotiate a better discount for you. The major banks, particularly, have taken advantage of people already with interest-only loan repayments and have increased their interest rates dramatically. Another strategy is to call the bank and say you wish to get a payout figure and they will put you through to the retention team. Once there, ask for a better discount. Always worth a shot.
- Swap to principal and interest repayments. There are significantly better rates for investors out there if you are prepared to swap to P&I – so much so that with the reduced rates, you could possibly be making the same payment, but reducing your principal as well.
- If your investment has become your owner-occupied home, you have the best opportunity to get a better rate, some as low as 3.59% (comparison rate 3.70%) with some lenders, so make sure you are only paying investment rates for investment properties.
- Review your portfolio to ensure you can afford to hold all properties if they all end up on principal and interest repayments. Can you afford to hold all properties and are they worth holding? Now might be the time to call us for a formal review of your portfolio, where we can assess your capital gain through valuations and then you can talk to your accountant about strategies for holding or selling.
- Look at fixing your loans. Banks are currently offering attractive fixed rates on investment loans – both principal and interest (from 3.84%-4.09%, Comparison rates 3.99%-5.04%) and on interest only (around 3.99% – 4.19% Comparison rates 4.09% – 6.05% and up). To maintain your repayments at a reasonable level, maybe look at fixing a few loans so you know where you are headed in the next few years. However, note if you do fix, there may be penalties when selling a property during a fixed rate loan term. Please, always ask us as we know many strategies, such as swapping securities, to ensure you do not get hit by unnecessary fees.
Also, I strongly believe the banks will start coming out with better offers on fixed rate loans as business has clearly diminished greatly for them (minor lenders have been much more competitive in this space) and they won’t want it to stay that way for long. With market pressures such as high electricity prices, it doesn’t appear rates are increasing anytime soon.
Bathroom Reading – Your earning depends on your toilet paper
Now if you happen to enjoy reading Newsletters like these in a quiet moment, such as in the bathroom, you might be interested to know which way you roll your toilet paper says a lot about your earning potential. According to Inc* those who roll under (leaving the loose end close to the wall) “tend to be more relaxed, more dependable and seek relationships with strong foundations,” while those who roll over (leaving the loose end away from the wall) might “like being in charge, like organisation and order and are likely to over achieve.” The good news for the latter? Two-thirds of them earn over $50,000 a year; the roll-under crowd earns substantially less.