Let’s talk about P&I repayments
P&I repayments – what’s going on with them and why it might be time to revisit them.
Banking regulator APRA has cracked down on interest-only mortgages following an announcement earlier this year, limiting interest-only lending to 30% of total new residential mortgage lending.
The Australian Prudential Regulation Authority has told lenders to limit higher risk interest-only loans to 30 per cent of new residential mortgages against a backdrop of high housing prices, high and rising household debt, subdued household income growth, and historically low interest rates.
“Our objective with these new measures is to ensure lenders are recognising the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions,” APRA chairman Wayne Byres said in a statement.
How does this potentially affect you?
If you’re looking for a new loan, P&I loans are currently a lot more favourable in terms of getting loans approved, and at a better rate. Recently, Interest Only rates have been raised and Principal and Interest rates have been cut.
Sticking with an Interest Only loan means that you are simply paying lots and lots of interest to the lender without making any headway in paying down the principal of your loan.
While lenders are under regulatory pressure to adhere to guidelines set out by APRA, a number of institutions have cut rates for owner-occupiers paying principal and interest (P&I) on their home loan. And it might also be a good time to consider fixing your loan, even for a one or two year period.
And for investors, Interest Only interest rates are increasing while the benefits of Interest Only loans are fading. Traditionally Interest Only loans have been more favourable due to the flexibility they provide with smaller repayments and an offset, but now, with interest rates increasing, that margin is closing. More reasons to start thinking more about Principal and Interest repayments.
Some examples of lender interest rate cuts (as at 24th August 2017)
- Commonwealth Bank has cut rates for its Residential and Wealth Package Residential one year fixed loans by 40 basis points
- ECU Australia has cut rates for its Premium Plus standard variable P&I loans by 43 basis points
- Macquarie Bank has cut its Basic and Offset two year fixed P&I loans by 31 basis points
- Aussie bank has cut rates for its Optimizer and Optimizer Plus one and two year fixed P&I by 31 basis points.
“With lenders mindful of both the proportion of their loan book that is for investment purposes, as well as the number of borrowers taking up interest-only payment options, many institutions appear to be using interest rates as the primary lever in their efforts to adhere to APRA’s lending guidelines,” Canstar’s Research Analyst, Josh Sale said.
“This has seen a number of institutions reprice their loans favourably for owner-occupiers, in particular, those willing to make principal and interest repayments, while at the same time increasing rates for investors – a common theme for some months now,” said Mr Sale.
“These recent movements suggest that lenders are actively trying to attract more owner-occupiers, and make repaying Principal and Interest a more attractive option to borrowers.”
Fixed loans rate cuts
While shorter term fixed and standard variable loan products recorded the most cuts, longer term fixed rate P&I loans had far less significant cuts.
Mr Sale says there may be a reason shorter term fixed rate products, are seeing more generous cuts.
“One year fixed loans have seen the most decreases, implying there could be some uncertainty with rates over the medium to longer term, with lenders hesitant to lock discounted rates for longer terms,” he said.
There has been a lot of speculation recently about whether the Reserve Bank (RBA) will raise rates soon and how that could affect mortgages.
Investor P&I home loans
Owner-occupiers are not the only ones experiencing rate cuts in August, with several decreases for investors paying P&I.
What are the potential drawbacks?
Okay, so there is always some bad with the good. Switching to P&I repayments means your repayments will be marginally higher, which can place a strain on household budgets. Principal and Interest repayments could mean a change in your lifestyle to accommodate those extra repayments. For some ideas on managing changes to your household budget, read our recent article ‘Budget doesn’t have to be a bad word’.
Remember, there’s no ‘one size fits all’ strategy when it comes to mortgages and repayments – everyone’s circumstances and priorities are different, but if you get the right advice you can have all your options explained and you can make an informed decision that’s in the best interests of your family for today and the future.
For a limited time only, the Oak Financial team are offering a free assessment on your current loan repayments so you can get an idea of whether or not P&I repayments would work for you. Contact us today to learn more or to book in your free loan assessment.
