How Can Interest-Only Loans Benefit Me?

Just recently, APRA, Australia’s main government authority regulating the banks and other lending institutions, announced that the limits on Interest-Only Loans will be lifted.

The change, which came into effect from 1 January 2019, means that lenders will no longer need to restrict Interest-Only Loans to 30% of the total funds they lend out to property purchasers.

As Interest-Only Loans are mainly used by property investors, this is good news for anyone considering buying an investment property in coming months, as it should mean getting access to funding is easier.

Why Invest in Property?

Property investing is a great way to achieve long-term wealth creation. It is also the vehicle of choice for thousands of Australians to build a retirement nest-egg.

It’s a strategy that makes a lot of financial sense.

With negative gearing and capital gains tax deductions, you can be assured of substantial tax-advantages.

However, as a property investor, you can also benefit from an Interest-Only Loan.

How Can Interest-Only Loans Benefit Me?

Normally, when taking out a mortgage to buy a home, the monthly repayments include both interest and principal components. You end up repaying the amount borrowed (the principal), as well as additional interest charges.

Over the course of a 30-year mortgage, you could end up paying twice the amount you borrowed due to all the interest charges.

However, when it comes to borrowing money to buy an investment property, many lenders offer Interest-Only Loans.

With an Interest-Only Loan, you only repay the interest component each month. You do not pay anything towards the principal amount. This ensures your monthly repayment is kept low, so the rental income you receive from the property covers the repayment amount.

The idea is that when you eventually sell the investment property, you’ll repay the principal back to the lender. Hopefully you sell the property for more than you bought it for, so you get to gain from the profits.

Limiting Interest-Only Loans

Back in March 2017, APRA imposed the 30% limit on lenders as a way to ensure they were not issuing too many risky loans. While Interest-Only Loans can be great for investors, there is some risk, especially for lenders, if property prices fall and investors default on their repayments.

Having seen the problems experienced by overseas banks from too many risky loans, APRA took a cautious approach to ensure we don’t make the same mistake in Australia.

With APRA now confident that the banks have tightened their lending standards and are not issuing loans to uncreditworthy individuals, the decision has been made to lift the restrictions.

Will the Change Boost Property Prices?

One of the effects of limiting Interest-Only Loans was that it made it harder for investors to get access to funding. With fewer investors in the market buying properties, it helped reduce demand, making life easier for owner-occupiers, particularly first-home buyers.

That was all well and good when the market was running hot.

However, recently we’ve seen Sydney’s property prices coming off the boil. There is now more concern that if prices fall too quickly, it could have a broader economic impact.

With interest rates at record lows, officials are keen to ensure that no unnecessary hurdles are preventing potential buyers getting into the market.

By making it easier to access Interest-Only Loans, those considering investing in real estate should now find it easier to get access to the funding they need. This should help drive greater demand for property, providing some momentum to real estate prices.

While this change alone won’t lead to any sudden shifts in property values, the message from regulators to the lenders is clear: KEEP ON LENDING RESPONSIBLY!

What Does the Change Mean for Me?

If you’re considering buying an investment property, now’s a great time to start looking.

With interest rates still at record lows, and prices having eased off in recent months, you can use this opportunity to snag a bargain that will generate strong long-term growth.

As lending standards are relaxed, you should find accessing an Interest-Only Loan at a competitive rate easier. This will give you the opportunity to turn your investment dreams into a reality sooner than you think!

How Can Upstate Help?

The team at Upstate are the leaders in the Northern Beaches real estate market, with many decades of local experience.

With the Northern Beaches being one of Sydney’s most desirable regions, combining the best of the outdoors lifestyle with proximity to the city, it’s a great area to invest in.

Speak to us today to find the ideal property to meet your long-term investment strategy! Contact us.

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