CUSTOMER INSIGHTS

Residential Investors - Is Your Interest-Only Term About to Expire?

Interest-only loans are a popular tool for saving money and maximising tax benefits as a residential property investor. But without a plan, the switch to paying principal may cause a rude awakening.


There’s recently been a growing focus among residential property investor communities about the expiry of interest-only (IO) periods on home loans. According to recent RBA data, approximately 200,000 home loans will end their IO term each year until 2021, resulting in average increases of $7000 to borrowers’ annual repayments. Interest-only loans are especially popular among residential property investors because of the potential cash flow and tax benefits they might provide.
 
If your residential investment loan is due to switch to P&I (principal and interest) repayments soon, act quickly so that you can work towards achieving the best outcome for your needs.
 
Understand your current situation

In a perfect world you’ll have a little bit of time to review your options. So if you’re reading this knowing that your term is nearing its close, why not double-check your contract and clear a time in your calendar for exploring next steps. 
 
First on your to-do list might be a talk with your current lender, to really understand the cost impacts of the upcoming changes. One of the most important questions to answer during this discussion is what your new repayments will look like, and whether these suit your cash flow.
 
Together with your new repayment amount, it’s a good idea to write down all the features and benefits of your existing loan. Here’s a checklist to help you:

- New P & I repayments
- Is your rate fixed or variable?
- Old Interest-only repayment
- Contract exit fee
- Offset account fee
- Cash out fees
- Other ongoing fees and charges

 
Also make a note of your current equity and the LVR of any new loan you’d seek, and think about whether your credit rating may impact your ability to access a new loan.
 
Refinancing your interest-only investment home loan

If Principal and Interest payments aren’t for you, maybe it’s time to consider alternative lenders. Shop around and use your checklist to compare what’s on offer, out in the market.
 
Remember to venture beyond the major banks when looking at your options.  You might be surprised at the value and service non-banks and specialist lenders are able to provide. For example, Bluestone offers up to 5 years of IO repayments on residential investment loans and just won Best Mortgage Product at the Australian Property Investor Awards 2018

Next Steps

If you’re a residential property investor, we’ve provided a few links below that you may find interesting.

If you are interested in learning more about refinancing your residential investment home loan with Bluestone, have a look at our offering here. Alternatively, you can get feedback on your specific situation by speaking to one of our investment home loan specialists. Just call 1300 608 658 or request a quote here (don’t worry - there’ll be no credit checks until you say so).

Useful Links

Australian Taxation Office’s guidelines for residential rental properties

Top performing suburbs in Australia

The RBA’s data on interest-only lending



The information provided in this article is general in nature and should not be taken as constituting professional advice.  Because we do not know your individual financial circumstances it’s a good idea to talk to an accountant or financial adviser before taking out a loan.