Today we share an article written by Michal Deegan from Do Financial, he is a specialist finance broker.
Interest only loans have been the norm
A common strategy that has been applied for many years is to only pay interest on an investment property. And, more often than not, this has been the best option to maximise your tax position and cashflow, allowing you to accelerate the payment of your own home.
But over the last 12-18 months especially, we have seen interest only rates increase substantially above the interest rates applied to a loan that has principal and interest payments. There is much commentary that interest only loans are riskier in nature, which will lead to higher default rates in the future – hence the additional margins applied by the banks.
There is certainly a strong argument that lending to medical professionals should not be dealt with in the same manner as general interest only loans. Unfortunately, we are a long way off from any lender differentiating their loan book in this manner.
What can You do?
If you have interest only lending, you will no doubt have seen the additional interest expense hitting your statement every month. Is interest only still the best option? Is there a way you can combat these extra interest charges?
Some recent examples have demonstrated that switching to principal and interest, has saved thousands of dollars in interest, even in the first 12 months. And this has been achieved by only a small increase in the repayments, in some cases even less than $100 per week. Additionally, the result has been a reduction in the principal balance, providing equity in the property. Equity that has not previously been achieved due to a declining property market.
If you have interest only lending, it’s important to have this reviewed. There are even significant differences in the rates applied between lenders for interest only products – and if you haven’t reviewed your lending, even in the last 6 months, you could be missing out on substantial savings. Making the right shift now could provide you with the ideal outcome in the future.
For any queries, please contact Michael Deegan at Michael@DoFinancial.com.au