INTEREST ONLY LOANS – ARE YOU READY TO PAY MORE?
Australian property prices soared in the past five years but times are changing and it pays to be aware. Many Australians have entered the property market via more-affordable interest-only (IO) loans, as opposed to traditional Principal & Interest (P&I) loans. However, changes in payment rules might hit mortgage owners hard if they’re not prepared. Here’s the rundown.
Why our regulators are putting the brakes on IO loans.
At its peak in 2015, the IO loan represented almost 40 per cent of housing credit in Australia. In March 2017, the Australian Prudential Regulation Authority (APRA) limited IO loans to 30 per cent of new home loans. APRA’s aim was to slow the market by making it harder for property investors to get an IO loan. To an extent, the measure has worked, but owner-occupiers are also feeling the pinch.
In addition, Australian debt is at an all-time high, with much of the debt attributed to mortgages. ABS figures show that annual wage growth stands at just 1.9% – the lowest in almost 30 years. In response, the Reserve Bank of Australia (RBA) is also pushing to cut back on lending opportunities in order to reduce risk.
What’s ahead for mortgage owners.
By paying IO every month, you maintain your mortgage but the debt doesn’t come down, as it would with P&I. Some people have been paying IO for up to 10 years. Government agencies are now demanding IO loans be capped at five years. In addition, mortgages must be paid off in 30 years. No extensions. That means that if you’ve been paying IO for, say, 10 years, you will very soon need to switch to P&I repayments that are high enough to cover the remaining mortgage debt within 20 years. For example, if you’ve been servicing a $1-million mortgage using 5% interest-only for 10 years, your monthly repayments will jump from $5,368 to $6,600. In terms of cashflow, that level of repayment is will be difficult for a lot of people to meet.
As IO loans reach their term over the next three years, it’s also expected that interest rates will rise, putting further financial pressure on mortgagees.
More paperwork ahead.
If you were to apply for a loan a few years back, chances are the bank would have asked for a copy of your tax return and little else. They might not have checked the finer details of your application at all. Not anymore! New regulations from APRA require every bank to follow the same process for loan applications and approvals. You will now be asked to complete a raft of paperwork and forms, and the banks are required to double-check all supplied information as a matter of compliance. As a result, fast approvals are a thing of the past.
If you are at all concerned or would like to discuss your options, please get in touch on (02) 9326 2788.