Do all clients benefit?
The last 12 months have seen a lot of changes and mortgage brokers need to adapt to the new landscape.
We certainly didn’t imagine that in some cases commercial loans would end up being cheaper than residential investment loans!
APRA isn’t trying to make your life difficult
As you’re aware most of the banks have made changes to their interest only policy and pricing because of lending caps put in place by the Australian Prudential Regulation Authority (APRA).
As mortgage brokers, we naturally don’t like having our options limited or the added complexity to choosing the right loan for a client.
However, this was the right decision for APRA to make for three reasons:
- Australia is addicted to interest only loans, this is a risk for the banks and our housing market.
- Few borrowers are aware just how much more interest they’ll pay with an interest only loan.
- There’s many people who were making interest only repayments even though it’s totally unsuitable for them.
In other words, get behind this change and educate your clients rather than complaining about APRA.
Great questions lead to great recommendations
We use a few simple questions to determine if interest only repayments are suitable for a client.
For example, you can ask your customers what’s more important to them:
- A lower rate or lower repayments?
- Higher borrowing power or a lower rate?
- Do you have a need to reduce your repayments in the short term?
If a lower rate or a higher borrowing power is more important to a customer then they should probably be paying principal and interest (P&I).
Owner occupied loans with interest only repayments
As a general rule, owner occupied loans with interest only repayments are unsuitable for most clients and you should only consider this if there’s a good reason to do so.For example, we’d consider interest only for a home loan if the client:
- Required repayment flexibility due to their business cashflow.
- Wanted to keep their funds on standby in the offset account in case of emergencies.
- Wanted to invest their excess funds.
If they’re not financially sophisticated, it’s dangerous.
They’re unlikely to benefit from interest only repayments and they may not pay off their home at all.
It’s time to talk to non-conforming lenders
We consider investment loans to be a type of non-conforming loan.
That’s not to say that banks don’t do them.
They’re just not the “flavour of the month” and you need to consider specialist lenders as well as major banks if you’re going to meet the needs of your property investor clients.
What do the numbers say?
Let’s say one of your customers is deciding between a $500,000 investment loan at a are 4.50% per annum over 30 years and a loan at 5.00% p.a. for 5 years with interest only payments, reverting to 25 years at 4.50% with P&I repayments.
Firstly, the repayments are $2,533 a month for P&I compared to $2,083 a month for interest only.
So the payments are 21% higher if they pay P&I.
At the end of the interest only period, the repayments would be $2,779 which is 9% higher than if they were to make standard P&I repayments over 30 years.
Few customers are aware of this and even fewer consider the effect that this will have on their cashflow.
Paying P&I, the customer would make total payments of $912,034.
With a 5-year interest only period they’d pay $958,749.
That’s a whopping $46,715 in additional interest!
Again, few customers are aware of just how much more it will cost them.
A good rule of thumb is that a 5-year interest only period will cost a customer 11% more in interest over the term, assuming that they don’t get another interest only period when their first one expires.
What about borrowing power?
If a single borrower with an income of $100,000 takes out a home loan, they can borrow around $620,000 with P&I repayments or $585,000 with a 5-year interest only period.
It’s not a huge deal – only a 6% difference.
For customers with multiple properties it can have a much bigger effect.
What about your existing customers?
Should you refinance them to the cheapest interest only loan available if they’re not happy with their bank? Probably not.
Variable rates can be changed at any time so what’s to stop the new bank putting their rates up?
Pretty much, it’s time for investors to pay Pamo;I.
Talk to these clients about either switching to P&I, refinancing to another lender with P&I payments or, if they want to keep paying interest only, fixing their rate.
Want to work for an investment loan specialist?
We’re Australia’s leading specialist mortgage broker and experts in investment loans and investment loan strategy.
Many of our broker are property investors in their own right.
If you have mortgage experience and you’re looking to make a career change, we’re always looking to hire brokers.
Send your resume through to email@example.com and we’ll be in touch.