Australia’s interest rates may be at”record low” however it is certainly not true for the 1/3 of all mortgages that are on interest-only.
The cash rate set by the Reserve Bank is indeed at a historic low, but in recent months, rates have risen significantly for borrowers of Investment Loans and those paying interest-only.
Westpac, for example, has jacked up interest rates by 0.7 percentage points for property investors with interest-only loans since last October, which is equal to an extra $2460 a year in costs on a $350,000 mortgage, Rate City says.
The other major banks have also all hiked interest-only rates, raising an important question:
Is it time for investors to ditch interest-only loans for Principal & Interest Loans and start paying down their debt?
Before the recent rate hikes, the argument for only paying interest each month was that it would free up a borrower’s cashflow, which could be invested elsewhere or paid off their principal place of residence. This stratgy would also maximise the tax deduction if the investment property is negatively geared whilst paying down their most expensive debt – the personal mortgage.
However, there’s a BIG QUESTION MARK over whether this strategy still makes sense for property investors now that interest-only loans cost significantly more than others.
Macquarie analyst Victor German crunched the numbers and estimated that someone on the top tax bracket with a $500,000 investment property loan would be about $6000 better off after five years, if they switched from an interest-only loan and started paying back principal Compared to Interest-only with maximise tax deductions.
Overall, the investors who are coming to us are realising it’s not working for them… with the interest rate difference you have a choice of staying on Interest-only and getting charged more interest OR going to Principal and interest and reducing your interest bill – even if sometimes this means a slightly higher monthly repayment the difference ends up in your pocket not the banks
So if you have investment or interest-only loans and want to get some advice call us today on 1300 855 244