Until only recently recommending interest only loans for investment purposes was a standard wealth creation strategy; that is no longer the case. If you are paying Interest Only on any loans, you need to review your strategy!
What does interest only mean?
A loan with a bank has a designated period. Residential mortgages are generally contracted over a 30 year term. If the entire term is “Principal plus Interest” (P&I), then each monthly repayment will be allocated to covering accrued interest plus an incremental allocation to paying down the principal loan balance. Interest Only (IO) loans will have an initial period (for example 5 years) where the borrower pays only interest, with the principal repayment then to occur after the end of the interest only period (for example over the last 25 years of the term).
Why Do That?
The primary benefit of this strategy is increasing the cash flow of the borrower, enabling re-allocation of funds to a more beneficial cause, such as paying off more expensive loans first, or for additional investment.
What Has Changed?
Whilst the interest rates applicable to P&I and IO were the same in the past, banks are now charging a higher interest rate for interest only lending, and the compounded difference to you could be thousands of dollars! Note this applies equally to business clients, with the potential costs even higher.
Does This Apply To You?
The Reserve Bank of Australia last changed interest rates in August 2016, decreasing rates at that time 0.25%. Has your bank increased your interest rate this year?
What Should You Do?
We are currently contacting our clients to discuss how these changes affect their individual strategy, and to recommend action. Please note we cannot contact every client at once! If you are an Integrity Finance Australia client and do not wish to wait for contact please feel free to contact us for immediate review. It is recommended all readers speak to your broker in relation to this matter, those who do not currently have their loans placed through a broker business can call us, yes we do offer a no charge and no obligation review.
Daryl Borden, Integrity Finance Australia Ph. 03 9511 8883 ACL 392184