Investors are facing a tough time with lenders at the moment as investment loans are becoming more restricted. In March, the Australian Prudential Regulation Authority (APRA) wrote to lenders, instructing them to keep new interest-only loans to just 30 per cent of their total home loans portfolio. This is to limit the volume of higher risk interest only loans on the lenders books which may be more vulnerable to a downturn in the property market. This has caused a flow on effect for lenders to now limit the products available to their investment clients, with some lenders removing ‘interest only’ loan products for investors.
How the Restrictions Affect You
Many investors are currently on interest only loans as part of their financial strategy, however this could be short lived. Some lenders are removing the ‘interest only’ products for investors all together and others are tightening the eligibility criteria for these types of loans.
This means those who are just about to take out an investment home loan will need to have adequate funds to service both the interest and principal when they borrow. Meanwhile, those who currently have interest-only loans may not be able to renew their interest only period, especially for loan value ratios above 80%, making borrowing for their investment property a lot more expensive. Some investors may not have the required cash flow on a month to month basis to make principle reductions to their investment loans and may be forced to sell sooner than they had antipcated/planned. This could greatly affect your finance strategies.
Can the Effects of the Restrictions be Minimised?
With proper planning, it is entirely possible to minimise the impact of the stricter criteria for interest-only loans. If you are nearing the end of their interest-only period, you need to come up with a strategy that will enable you to afford both the principal and interest once the said period is over. This could mean charging more in terms of rent and minimising other investment-related expenses in order to ease your cash flow.
Another possibility with an interest-only loan is to switch to a loan product that offers a lower interest rate, meaning you can afford the principal AND interest repayments. This is still a viable option considering that rates for most loan products are at record lows at the moment. Fixed interest investment loans may also be an option, allowing investors to budget and plan over the fixed rate period, whilst having certainty of their repayments.
What can you do?
If you have an interest only investment loan, speak to us today about their options to see if you are able to switch to a more suitable loan product, which helps meet your financial goals inline with your financial strategy.