The phrase “Forewarned is Forearmed” is as relevant today as it was when first used in the late 16th century, especially when it comes to matters of borrowing money.
If you have an interest only mortgage, or you’re intending to obtain one, then consider yourself forewarned. I hope this two-minute read will leave you forearmed and that it motivates you to take action before it’s too late.
So here is the forewarning!
If you choose to re-finance your Interest Only loan and remain on Interest Only it will no longer be a “fait accompli” that your new loan will be automatically approved as Interest Only without a lender’s inquisition.
Not considering refinancing anytime soon? Remember that most Interest Only loans revert to P&I after 5 years unless refinanced. Suddenly you’ll find that your monthly repayment takes a big hike because you’ll now be paying principle as well as the interest.
To clarify my point here is an extract from an industry magazine explaining ANZ’s recent policy change.
As of 5 March 2018, ANZ will regard interest-only (IO) loan renewals as “credit critical events” which require full income verification as part of its measures to streamline the credit critical process.
The requirements are set to apply to loan applications that involve changing from principal and interest (P&I) to IO, or extending an IO term.
Further, if serviceability is not evident, the loan will remain or revert to P&I.
ANZ will update process guides and renewal checklists to include the changes.
Moreover, customers will be notified by ANZ six months prior to the expiry of the IO period, and they will be informed of refinancing options available to them.
The bank noted that it is making the changes to further enhance its lending practices.
“We are making this change as part of our continual enhancements to our lending practices,” the bank said.
“Converting to or extending an interest-only period is a material change to original loan conditions, which could increase the total repayments over the life of the loan.”
Last year, the Australian Prudential Regulation Authority (APRA) imposed restrictions requiring banks to limit interest-only lending to 30 per cent of new loans.
In simple terms this change from ANZ means, and the others will probably follow, that you may need to find more of your hard-earned dollars every month to meet a P&I commitment.
On a positive note, lenders are encouraging P&I loans at the behest of APRA, by offering lower interest rates but even this will not stop the repayment hike you’re facing.
Here is an example to explain based on a $500,000 loan for Owner-Occupied borrowers.
Principal and Interest over 30 years @ 3.69% p.a. $2,299.00 pcm
Interest Only for 5 years @ 4.29% p.a. $1,787.50 pcm
Most Interest Only loans revert to P&I after 5 years unless refinanced.
As you can see even though the rate for P&I is lower the repayment, rather than a payment of interest only is over $500 more per month.
This is not an insignificant amount just for one loan so for borrowers with multiple loans the impact will obviously be even greater.
With the Royal Commission underway there is a strong chance lending policies and guidelines will become even tougher.
So be forearmed.
I strongly suggest you plan well ahead so that you do not receive a nasty shock when you come to refinance your loans.
If you would like us to crunch some numbers for you please call me on 0409 02 99 22 or email greg.clough@onyx.net.au
‘Praemonitus, Praemunitus’
Cheers
Greg