80% max lvr for interest only?

Hi all,

Back in June when I was originally looking at the numbers for my first investment property, my mortgage broker said we could do a 5 year fixed rate, interest only which turned out to be a 88% loan to value ratio. That broker has now left the firm, and I'm in the process of putting an offer in on a house. Today my broker has told me that the banks have recently changed policies, and that for an investment loan, they can only do principal and interest; and not interest only if the lvr is above 80%. Is anyone here aware of this happening now?

 

With a couple of exceptions, he's right.

 

The finance sector and each lender has literally been in a fluid state of change , you could probably find someone, but the rates will climb.

 

P&I is the general rule for IO above 80% - with the exception of a couple of lenders. Pepper and Homeloans Ltd spring to mind.

Cheers

Jamie

 

PS, do your calcs, it may work out similar to just do P&I.

 

Thanks all. I was still going to call my bank tomorrow and make sure there wasn't a error in what my broker told me just to check. Going by what they told me today I'd be spending another $300 a month which isn't a bad thing as at least I'm paying off the principal. However once the fixed rate is gone in a few years who knows how much extra I'll be paying, so interest only was more peace of mind.

 

This was part of the main changes in lending this year when APRA asked lenders to crackdown on I/O lending. It’s been part of the lending landscape for a few months now.

We have done a lot of P&I fixed lending above 80% LVRs over the last 6 months (investment purposes). For INV, Rates have generally been sharp with banks incentivising P&I repayments over I/O. There’s also been a pretty noticeable divergence between fixed and variable P&I INV rates (was around 50-70bps, and is now still around 10-30bps).

As your likely to be at a higher LVR and forced onto P&I, it may be worth considering whether fixing is suitable for rate benefit and certainty. It’s one of the product choices that incentivises fixing. If OO purchase, than this doesn’t really apply as variable is sharper/similar to fixed.

 

No, not really.

What it does it delay the inevitable and then the repayments on P&I become much higher because the loan term would be 5 years shorter.

IO was never meant to be a fix for not being able to actually pay back the loan.

If you are buying a home and think you can't pay P&I at 6-7%, then you need to spend less on your home.

 

In a few years time an I/O loan will become P&I by default and your payments would be about 10% higher than if you start with P&I today. The total cost of the loan over its lifetime will also be significantly higher.

I can give you good financial arguments for and against an interest only period. Basically it comes down to cash flow. In the absence of any other information, is a modest saving today worth more than the extra expense over the subsequent 25 years?

 

Agreed, IO can be a good option provided you're using the surplus funds wisely as part of your overall investment strategy. If you're just using the the additional cash on lifestyle it kind of defeats the purpose and you should probably be paying down the debt.

There are a few banks who will go above 80% still, not many though.