{"id":14120,"date":"2017-10-19T03:00:30","date_gmt":"2017-10-18T16:00:30","guid":{"rendered":"http:\/\/realestatetalk.com.au\/?p=14120"},"modified":"2017-10-19T03:00:30","modified_gmt":"2017-10-18T16:00:30","slug":"interest-only-lending-the-good-the-bad-and-the-ugly-part-two","status":"publish","type":"post","link":"https:\/\/channels.realty.com.au\/realtytalk\/interest-only-lending-the-good-the-bad-and-the-ugly-part-two\/","title":{"rendered":"Interest only lending \u2013 the good, the bad and the ugly (Part Two)"},"content":{"rendered":"

It doesn\u2019t seem that long ago that borrowers held the upper hand.
\nLenders were scrambling over each other to get their business.
\nTimes for borrowers were good, with competition aplenty in the banking marketplace.
\nAlas,\u00a0times have changed<\/a>\u00a0\u2013 but that doesn\u2019t mean that the banks don\u2019t want to lend you money. That is their business after all.
\nIt just means that you have to have your financial ducks in a row \u2013 especially around interest-only lending.
\nYou see, the majority of the lending restrictions currently in play are around investor lending, and interest-only loans in particular.
\nThe government regulator, APRA, is worried about the high number of investors in the market, as well as their propensity for interest-only loans.
\nNow whether this worry is justified is a blog for another day. I\u2019d rather take a look at why the regulators\u00a0think\u00a0interest-only lending can be problematic<\/a>.
\nSo, in this second part of my special three-part series, let\u2019s consider how interest-only lending can be bad.<\/p>\n

Borrowers can be complacent with the low cash flow requirements<\/h3>\n

Do you know the difference between interest-only and principal and interest (P&I) loan repayments?
\nLet\u2019s use an example of a $500,000 loan at an interest rate of 5.24 per cent to answer that question, shall we?
\nThe monthly repayment for a $500,000 P&I loan over 30 years would be $2,757.92, whereas the monthly interest-only repayment would be $2,183.33.
\nSo the difference between these two mortgage repayments is about $570 per month. And this is really even more dramatic in the current times where a principal and interest loan will be between half to three quarters of a percentage point (0.5-0.75%) cheaper than the interest-only equivalent, thereby narrowing this gap even more.
\nOne of the reasons why interest-only can seem bad is that borrowers can become complacent about their cash flow.
\nBecause they\u2019re only paying the loan interest each month their\u00a0repayments are lower, and therefore their cash flow is higher, but\u2026.<\/p>\n

What happens when your interest-only period expires?<\/h3>\n

Many interest-only borrowers are currently coming to the end of their terms, and lenders aren\u2019t overly keen for them to approve another interest-only loan period.
\nWhat does that mean?
\nWell, it means that that $570 per month they thought they had as spare cash (or cash flow) every month will now be required for mortgage repayments, because their loan has become P&I.
\nWhile most prudent borrowers will probably be able to wear this higher repayment requirement, that may not be the case for investors who own multiple properties.
\nFor example, say, John and Judy refinanced four investment properties, five years ago, to the same lender. Those loans were all interest-only but\u00a0the new lending landscape<\/a>\u00a0means they must now move to P&I.
\nUsing the above example again, that may mean that they will need to come up with an additional $2,000-plus a month (or four lots of $570) to meet their new mortgage repayments. How many people have $2,000 \u201cspare\u201d every month?
\nOf course with professional assistance, John and Judy would be able to negotiate with their lender, or refinance to another one who is more attuned to their financial hopes and dreams.
\nIt\u2019s still a scenario worth pondering though, isn\u2019t it?
\n <\/p>\n

Interest-only loans can be far more expensive<\/h3>\n

\"InterestAnother reason why interest-only loans can be classified as \u201cbad\u201d is that you are not paying off any of the principal.
\nNow for some investors this is a valid strategy for cash flow and tax efficiency reasons.
\nBut at some point in time the loan principal will need to be paid off.
\nThe ways that this can be achieved are numerous, and include selling the property, selling other property to pay off that property, or paying it off yourself over the life of the loan.
\nIf you were to pay interest-only, however, it would \u00a0also end up being far more expensive over the life of the loan.
\nHow much more expensive?
\nWell with our $500,000 example, if you only paid the interest over the life of a 30 year-loan, it will cost you a staggering $786,000 in interest \u2013 and you\u2019d still have to pay off the original loan amount of half a million dollars.
\nHowever if you made principal and interest repayments over the same period, the interest component would be $492,852.08 \u2013 a saving of nearly $300,000!
\nThe lending landscape is more complex than ever at present.
\nThere is a concentrated focus on interest-only loans, but that\u2019s doesn\u2019t mean they\u2019re not still available, or that they can\u2019t be used effectively to grow your wealth.
\nThe world of banking and finance can be a pretty daunting one for both novice and sophisticated investors, and since our establishment in 2002 we\u2019ve focused on providing outstanding service and business standards.
\nThis approach was vindicated when we were named Victoria\u2019s favourite mortgage broker at the\u00a0Investors Choice Awards<\/a>.
\nSo, if want to learn how to make the most of interest-only loan products, why not contact Intuitive Finance today to ensure you have the right information and expert support on your side from the very beginning.
\nYou can read the first part in my series on interest-only loans\u00a0here<\/a>.
\n 
\nDisclaimer:<\/strong><\/em>
\nThe information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.<\/em>
\nThis article was originally published on Intuitive Finance.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

It doesn\u2019t seem that long ago that borrowers held the upper hand. Lenders were scrambling over each other to get their business. Times for borrowers were good, with competition aplenty in the banking marketplace. Alas,\u00a0times have changed\u00a0\u2013 but that doesn\u2019t mean that the banks don\u2019t…<\/p>\n","protected":false},"author":176692471,"featured_media":14126,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[2,34],"tags":[70],"class_list":["post-14120","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-andrew-mirams","category-finance-topic","tag-featured"],"yoast_head":"\nInterest only lending \u2013 the good, the bad and the ugly (Part Two) - Realty Talk<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/channels.realty.com.au\/realtytalk\/interest-only-lending-the-good-the-bad-and-the-ugly-part-two\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Interest only lending \u2013 the good, the bad and the ugly (Part Two) - Realty Talk\" \/>\n<meta property=\"og:description\" content=\"It doesn\u2019t seem that long ago that borrowers held the upper hand. Lenders were scrambling over each other to get their business. Times for borrowers were good, with competition aplenty in the banking marketplace. 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