Given we have actually been dwelling in the land of low rates of interest for an extremely lengthy period of time now, you ‘d believe everything would be pretty straightforward when it concerns protecting financial investment finance nowadays.
Unfortunately nevertheless, the financing landscape is ending up being significantly difficult to navigate. Banks are hectic acting entirely contrary to monetary policymakers, and regulators are riding in at random junctures to stir the pot.
A Lot Less Interesting
When rates of interest dropped drastically and banks saw a chance to make hay while the sun shone on equity laden homeowners/would-be-investors, many lending institutions came out swinging with interest only loan offers that practically matched the going variable rate of the day.
These offerings resembled the proverbial dangled carrot, and resulted in a boom that saw 40 percent of all loans written in Australia by 2015 being IO.
Worried at the breakneck boost in the amount of individuals who were not actively paying anything on the principal of their home mortgages (typically protected against another mortgage) and therefore, making little to no headway in regards to their credit threat position, APRA swept in to impose harder conditions.
The Australian Prudential & Regulatory Authority’s 30 percent cap on the portion of new loans that could be released as interest only was highly effective. Some may suggest perhaps a little too reliable, at slowing a few of the more heated investor driven housing markets down.
Lenders took it as a chance to point the finger at APRA as the fall guy, whilst tightening up the purse strings and shoring up profits by raising interest rates independent of the Reserve Bank. And investor debtors were all of a sudden feeling the squeeze.
Too Little, Too Late?
Fast forward to today, and there have been numerous ups and downs within the financial services sector considering that those guidelines were imposed. IO loans have actually been on a little bit of a popularity roller coaster, as the banks battle a seemingly perpetual fight of trying to charm brand-new consumers in an excessively competitive market, whilst mitigating risk so as not to even more attract the ire of regulators.
Three years on and simply 15 per cent of all brand-new loans now being issued are interest only. Nevertheless, some experts are stating it’s too little, too late. The damage has actually currently been done. And the impact of the IO lending boom of 2015 hasn’t yet been fully felt. However it’s coming.
According to information, around $360 billion worth of IO loans are still outstanding and will mature over the next three years. This obviously accompanies a sharp correction in the residential or commercial property markets, causing numerous financiers to become stuck in that part of the cycle where equity falls rather than increases.
It Might Pay To Go Back To P&I
All alarmist rhetoric aside, banks are now attempting to turn the tide, using incentives to financiers who are considering changing back to principal and interest repayments.
As mortgage brokers, we’re currently seeing loan providers prepared to do some great deals for clients who are looking to actively decrease their loan principal and make headway with regard to the equity they keep in their properties.
Gone are the days of easy loaning. But the potential to negotiate a much better rate still exists. Especially if you’re prepared to pay down that principal too.
Eventually, doing so will not just see you save money and time on your home mortgage, but will also assist you to fortify that very important equity and potentially reach your investment goals faster.