As the saying goes, if you’re standing still, you’re going backwards.
Up until 6 months ago, deciding on P&I or IO repayments was easy, as the interest rate was the same for either, and the repayment type didn’t impact your borrowing capacity.
Today, it’s a very different story.
Let me explain.
A couple of months back I wrote a blog which was quite popular with our readers as it outlined what happens when your loan reverts to P&I.
Of recent times, commenters have gone to town writing about this very topic, as it’s becoming more evident that a whole bunch of mortgage customers will be exposed to higher repayments in a few years’ time as their IO term comes to an end.
This group of mortgage customers will discover that their repayment amounts will increase considerably once the loan converts to P&I, particularly if P&I repayments are amortised over the remaining term of 25 years (as the IO term is usually over 5 years).
Refinancing is an option, however some may not qualify given the more stringent credit environment we currently find ourselves in.
Credit policy may lighten up in a couple of years’ time… only time will tell..!
Here are 7 reasons why you should now consider making P&I repayments from Day 1:
- Pay off your home loan and ultimately own your own home or investment property asset sooner:
- Lower your repayments by amortising your principal repayments over 30 years as opposed to a 25 year period (IO term is usually over 5 years);
- Pay less interest over the 30 year loan term, as principal reductions lower your loan balance from Day 1 and interest is reduced each month as repayments are made;
- Increase your borrowing capacity as IO loans adversely impacts your serviceability for borrowing purposes;
- Achieve approval faster and easier, as IO loans are no longer flavour of the month with lenders;
- Achieve a much sharper interest rate as IO interest rates are more expensive nowadays, which can be as much as up to 100 basis points (1%) with some lenders; and
- Build your wealth faster by increasing your equity position, as equity is built up in your property as you pay down the principal loan amount.
IO loans still have their place, if the strategy is right, even if means paying a higher interest rate.
However IO loans should be considered very carefully and only taken out in certain circumstances so that you don’t get caught out down the track, and you don’t pay more interest than you have to.
The lending world has changed considerably and deciding on P&I or IO is now an even more important consideration when taking out a home or investment loan.
The regulator (APRA) has been calling the shots and has mandated banks/lenders to limit the level of IO borrowings made to Australian mortgage customers (refer blog explaining more).
Sometimes, you just have to roll with the punches and make changes as deemed necessary.
Ignore the changes at your peril.
Now more than ever, professional advice is key to ensure you make strategic financial decisions that are congruent with your bigger picture, and that are aligned with your financial goals.
Disclaimer: This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and seek specialist advice from a qualified and licensed advisor.
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