Interest Only loans have been a very popular mortgage strategy for property investors for some time now and until last year it was common to have your investment loan as an Interest Only loan. What changed? APRA imposed limits on banks to reduce their Interest Only lending with fears that people were not paying their investment loans down and were solely relying on the gain of the investment property to make a capital gain.

Let me explain to you how Interest Only loans work. Basically, the lender approves upfront a time frame where the borrower can make repayments only enough to cover the interest on the loan without reducing the principal. This time frame can be from 1 year to 15 years. After this period the loan is switched to a principal and interest loan, as the name suggests the repayments for a principal and interest loan are made up of the interest charged on the loan and also an amount to pay down the principal.

Interest Only loans are a property investor’s dream loan for the simple fact that the holding costs to hold an investment property reduces with an Interest Only loan while still maximising your negative gearing benefit. Usually, property investors choose to reduce the holding costs of their investment property to maximise their cash flow and also have the maximum interest charges. Higher the expenses, the more you can claim on your tax.

This strategy has worked for many years and the banks have been happy to lend Interest Only loans to property investors for some time and still are happy to lend Interest Only loans to investors, however we have entered challenging times, where lenders have not only increased their interest rates for Interest Only lending, but now also consider living expenses when calculating whether the borrower can afford the loan, basically its a lot harder to get a loan today, then it was 2 years ago.

If you currently have an Interest Only loan, be prepared for when the Interest Only period expires and your repayments increase. Something to consider would be to find out what the principal and interest repayment would be and start making that repayment into the loan, this means you will condition yourself to make the higher repayments from now and also build a buffer into the loan by paying extra. If you want to keep your current investment loan Interest Only even after the term expires, then keep in mind the recent changes the banks have made to the credit criteria as it may be harder for you to get an Interest Only loan now.

This is where it becomes important to use a broker for your finance needs, as we have access to over 30 lenders who all have different criteria for assessing your loan. One lender may accept your application, when the other lender may not.

“Don’t wait to buy real estate. Buy real estate and wait.” – Robert G. Allen