Powered by MOMENTUM MEDIA
the adviser logo
Broker

Rate spread to widen amid IO crackdown, says broker

by James Mitchell5 minute read

A leading Sydney-based mortgage broker has explained how regulatory pressures to reduce interest-only lending are having an adverse impact on the cash flow position of borrowers.

In a recent blog post, Origin Finance broker Graeme Salt weighed up the arguments for and against switching from interest-only (IO) loans to principal and interest (P&I) loans, as banks continue to reprice their mortgages.

To continue reading the rest of this article, create a free account
Already have an account? Sign in

“There was a time when property owners were advised that their investment loans should be interest-only and the loan on their own home should be principal and interest. But now some experts think that borrowers should radically change their loan structure,” Mr Salt said.

“The logic used to be that, as home owners were paying their home loan with after-tax dollars, they should focus on reducing this debt as a priority. Whereas, as the interest on investment loans is tax deductible, borrowers did not need to prioritise paying down these loans,” he said.

Advertisement
Advertisement

“Now, some believe that both owner-occupied and investment loans should be principal and interest (P&I).”

Since the introduction of APRA’s 30 per cent cap on all new IO lending in March, rates on P&I loans have fallen significantly lower than interest-only products.

Mr Salt pointed to recent research that shows the average basic investor variable loan is sitting at 4.87 per cent – some 0.56 per cent higher than the average owner-occupied principal and interest loan. He noted that some standard variable loans are now as high as 5.8 per cent.

“As a result, for some, it may now be more cost-effective turning all loans into P&I to enjoy the benefit of sharper rates,” he said. “And these spreads are likely to get larger. . . . Bankwest announced that it was increasing its interest-only loans by up to 0.35 per cent [recently], while it was reducing some P&I loans by 0.15 per cent.”

One argument for keeping some loans interest-only is that it improves cash flow. However, Mr Salt said that with recent reductions in P&I rates, borrowers may actually be better off paying the principal down, too. 

Mr Salt provided this example: If we compare a $400,000, 4.21 per cent P&I investment loan versus a 5.8 per cent interest-only investment loan, the monthly repayments would be: $1,864 (P&I) and $1,933 (IO).

“You can see above that making payments P&I has a better impact on the client’s hip pocket,” he noted.

Several other brokers have been making similar arguments recently, with Aaron Christie-David of Atelier Wealth revealing that he had been advising his clients to use P&I for the past year in recognition that the banks would be tightening up on IO lending.

The interest-only rate hikes by the banks have come under heavy scrutiny by industry figures such as Sydney-based broker Paul Ryan and former bank executive Steve Weston.

[Related: APRA tightening on investor lending ‘short-sighted’]

Rate spread to widen amid IO crackdown, says broker
bridging the gap
TheAdviser logo
bridging the gap

James Mitchell

James Mitchell

AUTHOR

James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.

JOIN THE DISCUSSION

You need to be a member to post comments. Register for free today

MORE FROM THE ADVISER

Anja Pannek CEO PLAN

Anja Pannek named MFAA CEO

The board of the Mortgage & Finance Association of Australia (MFAA) has confirmed that Anja Pannek will be the...

READ MORE
mike felton mfaa ta jdayl5

Aggregator heads reflect on Mike Felton’s legacy

Following on the news that Mike Felton is to retire next month and step down as chief executive of the Mortgage &...

READ MORE
melanie kiely afg ta mzh8zm

AFG non-executive director steps down from board

Australian Finance Group Ltd (AFG) has advised that Melanie Kiely will be stepping down from the AFG board to...

READ MORE
magazine
Read the latest issue of The Adviser magazine!
The Adviser is the number one magazine for Australia's finance and mortgage brokers. The publications delivers news, analysis, business intelligence, sales and marketing strategies, research and key target reports to an audience of professional mortgage and finance brokers
Read more