The APRA effect - Lowest IP loans are P&I with fixed rates

well,

This is the world we live in these days.

Lowest rate investor loans are for those fixing for 2 years and up and paying P&I - 3.88%.

Lowest IP variable that I can see is 4.19%. Quite a difference...

My guess is that this is due to lenders wanting to lock in new loans with some degree of certainty that they won't churn away over the next few years, allowing them to somewhat smooth their IP loan book growth?

 

The P&I fixed rates help smooth their transition under the IO cap. It's not just about bringing in new business, but holding onto existing and switching it over with the less painful option of offering a nice carrot of a good rate, than sharp interest rate rises.

It's going to create a culture shock to the investment community that we're all going to have to evolve with. For those with interest only debt and and PPOR the margins in a lot of case still give merit to PPOR owners who are actively using a debt recycling strategy - but if you're not following through with the key component of accelerated repayment of non-deductible debt you're just kicking the can down the road whilst paying a premium on rates.

I'd encourage everyone to look at their own budgets and establish whether they're actually redirecting that difference between P&I and IO onto their non-deductible mortgage, or whether they're leaving themselves open to a future where they may not have access to interest only.

 

Does this mean having a PPOR on IO loan with difference (between P&I and IO instalment) being saved in a offset a/c is not a good strategy anymore?

 

Is there an intention to ever make the PPOR an investment property? If not then you're paying a premium to use this strategy without a defined benefit. Likewise with most lenders now having the PPOR on interest only like that will reduce your borrowing capacity somewhat as they will treat the debt as having to be paid at an accelerated rate when the interest only term expires.

If there is a likelihood that you would convert the PPOR to an investment property in the future - there may still be benefit.

 

There is a possibility it will become a IP in future but not sure when. What if we convert it to P&I now and keep on paying it down and just before we make it a IP, we take out equity hence increasing the deductible debt again. Would that be a good option?

 

What would the equity drawn out be used for? An investment purchase? If you didn't use it for a deductible use (lets say you used it for a deposit on your new home) then it wouldn't be investment use and then the subsequent issues with deductibility.

The idea behind IO with offset receiving the equivalent amount of funds is to maximise your funds available should you want to make another non-deductible purchase (a new PPOR) - if you're potential paying a couple thousand a year extra interest based on this, you want to make sure you're definitely going to make use of the benefits.

 

I would sign up for that. Suits my strategy perfectly.

 

When equity is drawn out, it would be to buy a IP, not a PPOR.

 

I just hope that once, I've exhausted my options with the IO periods, that the opportunity for 3.88% PI loans are still available. Yes, it's a hit but much better than experiencing excess of 4.5% PI loans.

 

I have a dilemma, hope someone can guide me please.

ppor IO variable loan $330k - offset $330k rate 4.39 ( market value $925k )
IP IO variable loan $925k - offset $100k rate 4.29 ( market value $1.15M - $1.2M ?

Both loan with WBC - and crossed

Guide me please. My only concern what to do with IP Loan ?

 

your investment rate is lower than the main residence rate. Sounds like you are doing ok. Just uncross them

 

But wbc increase .34 IO loan. Would it be better change to PI loan now ?

 

It might be. But that is something you need specific advice on. As you have no non-deductible debt (assuming you had paid off the main residence with offset) then it might suit you.

But if you were about to retire or upgrade the main residence it might be different.

 

You've got good rates, but even with the increase coming in July, you've still got okay rates for the types of loans you have. It is probably fairly easy to show you a couple of lenders that might be about 0.2% cheaper but who's to say that those lenders won't increase their rates in the near future as well?

Refinancing for cheaper rates with interest only loans might not be a good solution right now, in a few months time people might find themselves in the same position anyway.

The best thing to do would be to get specific advice. Fixing the loan is one solution but if the loans are cross collateralised this could be a problem with future plans.

 

And consider how the offset is costing you money too:
Strategy: Don’t Keep Large Sums in Offset Accounts Strategy: Don’t Keep Large Sums in Offset Accounts

 

This is the trap....a lot of investors don't know about...and mortgage brokers in lot of instances did not point this (having said this they don't really have to).....

The repayments on a 640k loan at 4.2% PI is about 3130

The same loan at 4.93% I/O is still about 2630

So the differential is aobut $500 in cash flow....a lot of people can't see this........it will cause some misery down the track if they do not make informed decisions or plan for I/O periods expiring...

People in Sydney will feel it the most due to much higher loans here...

 

Problem is what other options does one have apart from selling down?

 

that is not a bad option if you lnow pi is going to kill you

 

This is my dilemma, should I pay an extra $5000 a month toward pi loan, or sell something which I'm happy to keep?

 

Another thread where people are realising they may have to sell when they initially thought they never would.

Yet more stock on the market with no investors to take it up....potentially.

Frankly I do not see legions of first home buyers either, lot of noise in media, sure there may be an initial surge, but 20k when paying even 400 is not a lot, sure it is nice for those that were going to buy anyway, but it does not look like a mass enabler to me.

Also they are not likely to be able to get IO for OO like they were before.