Interest-only loans are losing some of their appeal as principal-and-interest loans gain favour in the current lending environment of regulator crackdowns.
The popularity of interest-only loans generally comes through their lower monthly repayments.
This benefit is waning however, as lenders are increasing interest-only rates, lifting minimum deposits and lifting scrutiny levels amid pressure from banking regulators.
At the same time banks are lifting rates for interest-only loans, they are also offering incentives for principal-and-interest loans to make them more attractive to borrowers.
Banks are putting out special offers, loan-switching incentives and offering lower rates on principal-and-interest loans, bringing them front and centre of the mortgage market.
Finder.com’s Bessie Hassan told Australian Financial Review that the attractiveness of principal-and-interest loans was much higher than just 12 months ago.
“Once you find competitive rates it’s almost the same monthly repayment,” she said.
“The added benefit of a principal-and-interest loan is slicing years off the repayment term.”
Lenders are no longer doing anything they can to offer cheaper rates on interest-only loans, and any increases to the official cash rate by the RBA in the future is expected to hit interest-only loans harder than any other.
The current regulatory crackdowns come from concerns that a good proportion of borrowers haven’t built enough of a repayment buffer even though the market sits in an ongoing period of low interest rates.
The Reserve Bank is putting the heat on interest-only loans, fearing they are driving hot demand in Australia’s property hotspots, hurting housing affordability and increasing household debt.
Lenders are being told to keep interest-only loans to 30 per cent or less of their new residential mortgage loans. Conditions are even tougher for these interest-only loans that have small deposits.
In this changing mortgage environment, borrowers need to now carefully look at whether their interest-only mortgage stacks up.
While interest on investment properties are a tax deduction, interest-only loans make it harder to build equity, so borrowers are heavily reliant on a property’s price to rise to improve their position.
The possible choice of principal-and-interest loans is now an important one for borrowers, speak to Perry Finance today to discuss your property lending options.
