What are effects on switching to P&I for serviceability?

Hi all,

I've got an offer from two of my banks to switch to P&I on my investment loans. The discount between what I'll be paying on IO vis P&I is roughly a 0.7% discount - which is pretty good.

Apart from the obvious effects on my raw cashflow - I'm also weighing up the effect this would have on my ability to get more loans in the near future. I've got some equity to unlock - but servicing under the new rules has been tight.

My simple understanding is that most banks are using a P&I repayment at 7.5% when calculating servicing? So my thinking is switching my loans to P&I would actually have no impact on my servicing?

Or is it not as simple as that?

 

Im a big fan of P&I in today's environment however by going to P&I you are going to severely hurt your servicing with the limit lenders that do actual repayments (such as Liberty) or actual payments plus loading/buffer (Qudos and Pepper).

So you need to consider whether or not you are using these lenders in your portfolio in the short term.

 

The biggest consideration is the remaining term of the loan.

Those with 10 year I/O terms are now seeing the remaining 20 years assessed at a banks sensitised assessment rate ( say 7.25% ) but over 20 years rather than 30 years

Those with 5 year I/O terms- as above but 25 years.

So switching to P&I after say, 2 years of I/O improves capacity more than switching after 5 years or 10 year I/O terms because it allows the lender calculator to assess your debt over a 28 year remaing term rather than 20 or 25 year remaining terms, which is what happens for 5 or 10 year I/O terms.

But a simple P&I switch isnt going to improve your capacity significantly on a "per loan" basis. If you had 5,6,7 loans you moved to P&I , maybe...... but 1 loan.... modest impact. The real value of switching even 1 loan to P&I comes from paying down debt while retaining the rental income. Thats what will reap the bigger rewards down the track.