Interest only or principal and interest…
As you may have noticed most of the major banks and smaller lenders have recently made some significant changes to their interest rate offerings in order to become more in line with industry policy and recommendations. Initially it was investment loans that were subject to the most changes, however now Interest Only loans are in the spot light.
Interest Only borrowers’ are experiencing an increase of as much as 0.8% to their existing home loans, whilst ‘new to bank’ applicants are seeing an even higher difference to as much as 1% and sometimes not even given the option to select interest only repayments at all.
For this reason, we feel it might be time for borrowers to make the switch to principal and interest when possible.
But what does this look like and could this switch be more beneficial than you initially realised?
Let us show you an example…
Bill and Joanne have a residential loan of $500,000 and were paying 4.5% on interest only, their repayments were $1,875 a month.
Loan Amount – $500,000
Existing Rate – 4.5% Interest Only
Existing Repayment – $1,875 per month
Their rate increased recently meaning their repayments increased by 0.5% to $2,083, an extra $208 per month which is equal to $2,496 per year.
Loan Amount – $500,000
New Rate after 0.5% increase – 5% Interest Only
New Repayment after increase – $2,083 per month
Extra Repayment – $208 per month
As principal and interest rates have dropped recently, Bill and Joanne have the option of moving this loan to a principal and interest rate. Some rates, even for investors, can be less than 4%, so let’s use 4% for this exercise.
Loan Amount – $500,000
Switch to P&I – 4% Principal & Interest
New Repayment after Switch – $2,387 per month
Difference in Repayments – $304 more per month
If they choose to switch, their new repayments (on the same loan amount) would be $2,387 per month.
This is $304 more per month than the new interest only repayments.
However, the interest saving is $5,000 per annum, which is quite a substantial amount!!!
What this essentially means is that if Bill and Joanne pay an extra $304 per month in repayments, they are not only reducing their loan, they are also reducing their interest by more than $5,000 per annum!
Of course, there is still a place for interest only loans and it can be a great option for investors if the need for maximum cash flow is more important, or even just for tax deductible purposes alone; so if you are interested in receiving some tailored free advice and an exact comparison based on your existing loans then please reply to this email so we can assist further and highlight the interest savings you could achieve!
