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Should I Switch To A Principal & Interest Loan?

Given we've been dwelling in the land of low rate of interest for an extremely lengthy time period now, you 'd think everything would be pretty simple when it concerns securing financial investment finance these days.

Unfortunately nevertheless, the lending landscape is ending up being increasingly difficult to navigate. Banks are hectic acting entirely contrary to monetary policymakers, and regulators are riding in at random junctures to stir the pot.

A lot less interesting

When rate of interest dropped drastically and banks saw an opportunity to make hay while the sun shone on equity packed homeowners/would-be-investors, many lenders came out swinging with interest only loan deals that virtually matched the going variable rate of the day.

These offerings resembled the proverbial hung carrot, and led to a boom that saw 40 per cent of all loans written in Australia by 2015 being IO.

Worried at the breakneck increase in the amount of people who were not actively paying anything on tips to get a much better rate on your mortgage the principal of their home loans (often protected versus another mortgage) and for that reason, making little to no headway in terms of their credit threat position, APRA swept in to impose tougher conditions.

The Australian Prudential & Regulatory Authority's 30 per cent cap on the portion of new loans that could be released as interest only was highly efficient. Some might suggest possibly a little too effective, at slowing a few of the more heated investor driven housing markets down.

Lenders took it as an opportunity to blame APRA as the fall guy, whilst tightening up the purse strings and supporting profits by raising rate of interest independent of the Reserve Bank. And investor debtors were suddenly feeling the squeeze.

Too little, too late?

Fast forward to today, and there have actually been numerous ebbs and flows within the financial services sector given that those policies were implemented. IO loans have been on a little bit of a popularity roller coaster, as the banks battle a relatively perpetual battle of attempting to charm new customers in an overly competitive market, whilst mitigating risk so as not to even more draw in the ire of regulators.

3 years on and simply 15 per cent of all new loans now being provided are interest only. Nevertheless, some experts are saying it's too little, too late. The damage has actually already been done. And the impact of the IO financing boom of 2015 hasn't yet been totally felt. But it's coming.

According to information, around $360 billion worth of IO loans are still outstanding and will mature over the next 3 years. This of course coincides with a sharp correction in the residential or commercial property markets, triggering lots of financiers to end up being stuck in that part of the cycle where equity falls instead of rises.

It might pay to revert to P&I

All alarmist rhetoric aside, banks are now trying to turn the tide, offering rewards to investors who are pondering switching back to principal and interest repayments.

As home mortgage brokers, we're presently seeing lenders prepared to do some excellent deals for customers who are seeking to actively minimize their loan principal and gain ground with regard to the equity they keep in their properties.

Gone are the days of simple lending. But the prospective to work out a much better rate still exists. Especially if you're prepared to pay down that principal as well.

Eventually, doing so will not only see you save money and time on your home loan, but will also help you to fortify that all important equity and possibly reach your financial investment goals faster.