The Switch to Principal and Interest Repayments
You may have originally set up your Investment or home loan with Interest only repayments and in the past there were two very good reasons to do so;
1. Maximising your tax-deductible debt, while focusing on repaying your non-tax-deductible debt.
2. The flexibility of minimising your contractual repayments.
However differential pricing now applied by the majority of Lenders means this approach is now ineffective. With interest-only (IO) loans now between 0.45 and 0.6 percentage points more expensive than principal and interest (P&I) loans, it is economically rational for borrowers to switch.
An analysis using a 0.5 percentage point differential, a bank customer in the top tax bracket with a $500,000 loan would be $6,000 better off after five years, and $12,000 better off after 10 years switching to P&I.
The banks regulators are placing limits to restrict this growth to 30% which is why your bank is likely encouraging you to make the switch. The majority of Lenders are waiving the fee to make the switch and also offering some attractive fixed rates.
Take an average Investor now paying 4.60% on their Interest only investment property. Switching to a two year fixed rate of 3.88% could save Interest of $7,200 over two years based on a loan of $500,000.
If you are Interested in discussing your options please get in touch via our contact us button.