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10 Year Interest Only Loan?

Discussion in 'Property Finance' started by House, 17th Sep, 2015.

  1. House

    House Well-Known Member Premium Member

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    I've heard that the option of a 10 year IO loan is possible, has anybody done this and would it be more beneficial for investing?

    Trying to think of any cons related to it other than the jump when it moves to P&I. But by then my income and rent would have increased enough to carry this easily.

    Also, another thought was the effect inflation would have on the mortgage. Assuming 3% inflation p.a., an $800k mortgage would be repayable with $590k of today's dollars... 'saving' $20k a year.
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Quite a few lenders will allow 10 or even 15 years interest only.

    When assessing an interest only loan, lenders assess affordability over the amortization period after the interest only period expires. So for a 30 year loan with a 5 year I/O term they assume P&I payments over 25, for a 10 year I/O term payments are based on 20 year P&I calculations.

    This can make a significant difference to affordability calculations. Banks don't give any consideration to assumed future income or rental increases.


    As to the effect of inflation on a mortgage, thing of what's changed over the last 30 years. In 1985 you might buy a house for $40k - $60k in some good locations. Like today, people were worried about making ends meet, so this was considered a significant commitment. Today you might pay $800k or more for the same house.

    When it comes to mortgage repayments and affordability, inflation is your friend.
     
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  3. Jeffb

    Jeffb Active Member

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    Just got preapproval with NAB and it will be 10 year IO

    However, I just renewed my 5 year IO with CBA for another 5 years...
     
  4. sumterrence

    sumterrence Well-Known Member

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    Westpac have the option of 15 years I/O on investment loan and 10 years I/O on owner occupied loan
     
  5. Redom

    Redom Mortgage Broker Business Member

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    Yes you can do 10 year I/O with quite a few funders still on investment debt, to name a few on the top of my head:
    1. CBA
    2. Westpac/St George (can do 15!)
    3. FirstMac (pretty sure)
    4. Homeloans (with a couple of their funding lines)
    5. ANZ

    5 year I/O with Nabbroker, Macq, etc.

    It is becoming harder and harder to get these sort of I/O periods on PPOR debt though. St George just announced a reduction to 5 years - down from 15 years not too long ago.

    In terms of what APRA have done, with certain funders they've now needed to 'increase the effective assessment rate' on interest only debt BY reducing the loan term.

    In terms of impact on $1mill worth of debt to your borrowing power - for funders like ANZ:


    Cheers,
    Redom
     
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  6. House

    House Well-Known Member Premium Member

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    15 year IO? Even better! Are there any extra costs associated with doing this? Seems to be very much in favour of the investor.

    From the graph above it's about $20k more to get the 15yr IO, that would be worth it in my book given all the extra cashflow you could redeploy to increase the asset base over the extended time.

    So if you have a positive cashflow IP of $100/week, the bank would assume 15 years P&I?
     
  7. Redom

    Redom Mortgage Broker Business Member

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    Ah clarification of the chart:

    15 year I/O term means that there has been an increase in the 'assessable expense' of close to 30k. Thats massive. Imagine increasing your expenses by $600 per week (or having two kids!). Reduces your borrowing power by ~$350k compared to P/I loans with certain funders in this new climate.

    Cheers,
    Redom
     
  8. House

    House Well-Known Member Premium Member

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    Well then... fiddlesticks!
     
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