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Interest Only Loans

DO YOU HAVE AN INTEREST ONLY LOAN?

BACKGROUND.

The banking regulator, Australian Prudential Regulation Authority (APRA) in 2018 imposed new limits on Interest Only (IO) mortgage lending.

APRA indicated that high housing prices, high and rising household debt, subdued income growth, low interest rates had combined to create an environment of heightened risk in the property market.

THE RESULT.

Due to pressure from federal agencies, many lenders capped the number and value of their IO loan books and also increased the interest rate to reduce any growth in IO loans.

Now many lenders will not extend an interest only period when the existing interest only period expires and they will force the borrowers into to a principal and interest reduction for the remaining term of the loan.

Herein is the probem for many borrowers.

It is to be remembered that if an applicant obtains a 30-year loan and they request the first 5 years interest only, when that 5 year term expires, the borrower then only has 25 years left to repay the entire debt with principal and interest which becomes a double whammy.

This can have a tremendous negative impact on borrower’s cash flows as some repayments on interest only loans converted to principal and interest, with the remaining term, increase by $450 per month. This increase though is dependant on the amount of the loan and the number of years left to repay.

Most lenders have different credit policies and restrictions regarding interest only loans so it is important for borrowers to see their broker at least 6 months in advance of the expiry of the interest only term so preparation can be made to review each borrowers financial standing and determine if there is a valid argument to extend the term, or seek out lower interest rates.

WHAT TO DO?

If you have an interest only loan and the interst only term expires in the next 12 months, you really need to contact your YFG representative now to start making plans on how you plan to deal with the likelyhood your present lender will not extend the interest only term.