Our Melbourne Office has moved!
We look forward to seeing you soon at 412 St Kilda Road.

Calculator-Stethoscope

Interest only loans | The changes and what they mean for you

🕑 3 minutes read

Share
This

Interest only loans

There has been a regulatory crackdown on lenders by Australian Prudential Regulation Authority (APRA) to reduce their interest only loans to no more than 30% of their book. Where 2 years ago, interest-only mortgages represented more than 45% of new loans, they are now under 20%. This move away from interest only lending is intended to bring down Australia’s record high household debt-to-income ratio and ease property prices. The impact has already been felt with auction clearance rates continuing to decline.

What else has changed?

Under the banks’ stricter lending guidelines for existing lending, it’s no longer possible to have an interest-only term extended on any existing loan (whether it be owner occupied or investment) without having a serviceability assessment done by the lender.

The same may also apply to shuffling debt between 2 loans, one that is interest-only and the other that is principal and interest. Even though a borrower’s overall loan exposure may not change, if there is an increase to interest-only lending, it’s likely that they will have to lodge a formal loan application supported by current income and expenses documents.

Interest-only loans, whether funding owner occupied or investment property purchases, will likely also attract a higher interest rate. Borrowers can expect to pay an additional 0.50% – 0.60%pa more on their interest-only home loan.

The impact of the changed lending climate

A large amount of the household debt that has been acquired would not meet today’s more conservative lending standards. The Reserve Bank of Australia has warned that many of the interest only loans obtained a few years ago, will see borrowers enter into financial stress when their interest-only periods expire as the loans will no longer be affordable.

So, what does this mean for you?

  • Expect that your financial position will need to be reviewed, and will be under more scrutiny when you seek to alter your existing borrowing arrangements or seek additional finance. Applications will also likely take longer to approve.
  • Be realistic regarding your living expenses and true affordability of your loans on principal and interest basis rather than interest-only. This is applicable for investment or owner occupied purposes.
  • Seek the advice of your bank, broker or accountant and conduct a review of your current banking arrangements and future financial position.

If you’d like to speak to someone to discuss your lending options or review your current banking arrangements, click here to book an obligation-free initial consultation.

* The information contained in this site is general and is not intended to serve as advice. DPM Financial Services Group recommends you obtain advice concerning specific matters before making a decision.

Share This

Email
Facebook
LinkedIn

Subscribe to our newsletter

Gain thorough knowledge and valuable advice on financial services tailored specifically to medical professionals.

Bright futures. Better with the right roadmap.

Recommended for you

Subscribe to the latest news from DPM

Start your journey with DPM today.

Home

DPM acknowledges the Traditional Owners of the land where we live and work. We pay our respects to Elders past, present and emerging, and Elders from other communities we may visit and walk beside. We recognise their connection to Country and their role in caring for and maintaining Country over thousands of years.

Scroll to Top