How to cope when interest only loans switch over

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When a loan moves from interest only to principal and interest, borrowers are forced to pay up to 40% more in repayments. For investors who are about to see their loan repayments soar, what are their options?

Michael Beresford, director – investment services at OpenCorp, says having an interest only loan is undoubtably the best option for investors, as it allows for more money in their back pocket to reinvest.

“With that said, the most common time an investor dips into their savings is when their interest-only period expires – and they are suddenly required to start paying the principal off their loan,” he says.

“Over the last two years, lending restrictions have exacerbated stress for investors in this position because the kinds of loans and interest rates available to them have fluctuated so much. In addition, the servicing calculators used by the banks to determine your ability to refinance or to take on additional loans have been the toughest that I have seen in my 20 years involved in property.”

In 2015, interest only loans accounted for 40% of all mortgages. Through the market growth in Sydney especially this percentage increased to the point where in February 2017, 60% of all loans applied for were for interest only loans.

“This posed a significant risk to lending institutions, where speculative investors were chasing quick returns, at the top of the boom in Australia’s most expensive market, which effectively triggered the 2017 lending changes,” he shares.

For investors now, “there are far better things you could be doing with your money than plowing it into the principal loan repayments of your investment property – things like building your portfolio, when your equity and borrowing capacity allow,” Beresford adds.


There are three things you need to be doing right now in order to optimise your financial position, Beresford says. He outlines these in depth in the July 2019 edition of Your Investment Property

- On sale at news agencies and Coles supermarkets from June 6 to July 4, 2019; or download the magazine now.

 

 

Top Suburbs : mortdale , queens park , torrensville , artarmon , alexandra hills

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