According to a recent news report, more than 900,000 interest only (IO) home loans will come up for refinance during the first quarter of 2019. This kind of loan is very popular with property investors, however, the recent tightening of lending conditions in this area of the market may make it difficult for some people to refinance to another interest only period on their loan.
So, what are IO home loans, what are they used for; and how can Presidio Finance Consulting help you if the IO period on your home loan is about to come to an end?
What is an IO home loan?
An IO mortgage is where your repayments only cover the interest on the amount you have borrowed during the interest only period. That means the principal (the amount you have borrowed) does not reduce. This IO period can be from 1–10 years and after it has ended, the loan reverts to a principal and interest loan unless you refinance it.
What are IO home loans used for?
IO home loans are not recommended if you plan to live in the home you purchase, as they only provide short-term benefits and could cost you more in interest over the long run. This kind of home loan offers benefits for property investors because the interest is usually tax-deductible. (Always consult an Accountant to be sure this applies to you.) It also helps to lower the amount of the repayments in the short-term, which may help property investors to maximise the income from the property.
It should be noted that the principal (amount borrowed) will need to be repaid at some point. There is a risk that the property’s value could fall during the IO period, which could potentially cause a you to make a loss if you were to sell it. It could also make it difficult to refinance the loan at the end of the IO period without topping up the equity in the loan.
Why could it be difficult to refinance for some?
In 2016, the Australian Prudential Regulation Authority (APRA) — which is the regulator for the home loan industry — imposed a cap restricting IO home loans to 30% of bank’s new mortgages and at the same time, imposed a 10% annual growth cap on lending to property investors. These restrictions mostly applied to the big banks, as APRA felt they were over-exposed to risk if the property market should suffer a down-turn. This has caused a general tightening of lending criteria for property investors across the board.
In December last year, APRA lifted their restrictions. However, the tighter lending criteria for property investors and IO loans are still in place with the big banks, which could make it difficult for some to refinance or extend their IO period on their loan.
What if your IO period is about to end?
As your Mortgage Broker, I can help you access a wider variety of lenders, which could give you more options if you are looking to refinance your IO loan this year. We have access to Australia’s leading lenders, including the usual big banks and credit unions, as well as smaller, private lenders you can only access through a broker. Not all mortgage brokers can offer you such a comprehensive variety of loan options, so you can be sure that we will be able to access loan products that suit your needs and give you value for money.
Refinancing could potentially be of benefit to you in a variety of different ways in your personal situation, so please talk with us about your needs and goals. Your consultation is complimentary, so please feel free to contact me if you’d like to talk about your options.
Gavin Blaine, Lending Specialist ⎸E email@example.com
Presidio Finance Consulting ⎸Level 1, 32 Logan Rd, Woolloongabba Qld 4102 PO Box 1186, Coorparoo DC Q 4151 ⎸Ph 07 3391 7055
Presidio Finance Consulting Pty Ltd ABN 51 128 973 508 holds individual memberships with the Mortgage & Finance Association of Australia (MFAA); and holds an Australian Credit Licence number, 391109. The information contained in this email is general, and does not take your individual financial situation into consideration. Your full financial situation would need to be reviewed prior to acceptance of any offer or product. Rates are supplied by various lenders and mortgage managers. Connective and Presidio Finance Consulting Pty Ltd takes no further responsibility for their accuracy. All rates are indicative annual rates only, and are subject to change without notice. Rates for residential loans only. Nothing in this sheet states or implies that any credit is available. Other fees and charges may apply. Unless specifically indicated, this email does not constitute formal advice or commitment by the sender of Presidio Finance Consulting Pty Ltd.
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