Are you paying Interest Only?
Until only recently recommending interest only loans for investment purposes was a standard wealth creation strategy; that is no longer always the case. If you are paying Interest Only on any loans, you need to review your strategy!
What does interest only mean?
A loan with a bank has a designated period. Residential mortgages are generally contracted over a 30 year term. If the entire term is “Principal plus Interest” (P&I), then each monthly repayment will be allocated to covering accrued interest plus an incremental allocation to paying down the principal loan balance. Interest Only (IO) loans however will have an initial period (for example 5 years) where the borrower pays only interest, with the principal repayment to start after the end of the interest only period (for example this means you pay the principal down over the last 25 years of the term).
Why Do That?
The primary benefit of this strategy is increasing the cash flow of the borrower, enabling re-allocation of funds to a more beneficial cause, such as paying off more expensive loans first, or for additional investment.
What Has Changed?
Whilst the interest rates applicable to P&I and IO were the same in the past, banks are now charging a higher interest rate for interest only lending, and the compounded difference to you could be thousands of dollars!
Does This Apply To You?
The Reserve Bank of Australia last changed interest rates in August 2016, decreasing rates at that time by 0.25%. Has your bank increased your interest rate this year? Possibly it has, given the changes in investment and interest only lending market rates are more segmented than they have been in the past.
What Should You Do?
It is an ideal time to review your current investment property and gearing strategy. A loan which has been suitable in creating wealth in the past may now comparatively not be as beneficial. If you would like to review your position please contact us as we do offer a no charge and no obligation review.
Please contact Nic Berry or Tom Bailey at Integrity One if you’d like more information on this topic.
Phone: (03) 9723 0522
Suite 2, 1 Railway Crescent
Croydon, Victoria 3136
Nicholas Berry Credit Representative Number 472439 and Thomas Bailey Credit Representative Number 472440 are Credit Representatives of Integrity Finance (Aust) Pty Ltd – Australian Credit Licence 392184.
This information is of a general nature and does not take into consideration anyone’s individual circumstances or objectives. Financial Planning activities only are provided by Integrity One Planning Services Pty Ltd as a Corporate Authorised Representative No. 315000 of Integrity Financial Planners Pty Ltd ABN 71 069 537 855 AFSL 225051. Integrity One Planning Services Pty Ltd and Integrity One Accounting and Business Advisory Services Pty Ltd are not liable for any financial loss resulting from decisions made based on this information. These articles are not owned by Integrity One Planning Services. Please consult your adviser before making decisions using this information.