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Banks and brokers caution about rise in interest-only loans

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Julia Corderoy | 26 Sep 2014, 08:17 AM Agree 0
‚ÄčAs mortgage customers are increasingly opting for interest-only loans, banks and brokers are warning of the risks in the long-term
  • marty | 26 Sep 2014, 08:59 AM Agree 0
    Why would you pay P&I on an investment loan when you also had non deductible debt ie a home loan. Children.
  • Brett | 26 Sep 2014, 09:07 AM Agree 0
    Very traditional ideologies sometime catch us up.

    Consider someone who purchased a residence 30 years ago. Using a line of credit, in the Brisbane market, they would have paid rough $70K, borrowing even at $70K and paying interest over that period, are they hard done by.

    We need to challenge our boundaries and consider new approaches in this changing age.
  • Colin Rice | 26 Sep 2014, 09:27 AM Agree 0
    If you store the principal in an offset account and have the self discipline not to spend it then it is a simple and powerful strategy to manage cashflow to YOUR advantage, wether you are a property investor or owner occupier or both. Its like a gun. If you use it properly it can be a "good" tool, if you use it incorrectly it can be deadly. How does a broker/bank determine if an I/O will be in the clients best intrest? A cursory glance at the A&L as well as determining future goals and objectives from the outset by asking the right questions The above advice does not make sense and is based on assumption in my opinion.
  • Tim H | 26 Sep 2014, 11:03 AM Agree 0
    Some thoughts to consider here. Increasingly young first home buyers are using Family Guarantee / Pledge style loans due to finding it hard to save for a deposit making the loan on the property they buy interest only while making the loan against parents home P and I and clearing this first.
    Simple strategy that releases the parents home sooner and still is reducing debt. Most brokers I talk to are recommending this strategy.
    These articles sometimes only look at the surface issues and don't dig deep into what may actually be happening.
  • Tony | 26 Sep 2014, 11:05 AM Agree 0
    I have had a scenario where the client was advised by a broker to pay as much off her first home as quickly as possible to give her the ability to buy a better home later. the unfortunate things was the Broker didn't ask or didn't listen to the clients plans down the road. The clients sole desire was to use the first unit as a stepping stone to a bigger property at Leichhardt in Sydney, and keep the unit as an investment. When I met her she had paid down the loan on the unit to $90,000. She was ready to buy a property for $750,000. The problem was that she had all her "Cash" in what was to become an Investment Property. So if we had have moved forward, the client would have borrowed $78,000 for purchase and costs of the new owner occupied property, and pay interest on the whole amount with no tax deductions. Kept a $90,000 loan on an Investment Property earning $450 per week in rent, whilst paying tax on the profit of the rental.

    The client asked was there a way she could have done it better. The answer was to have an Interest Only Loan on the (at the time) Owner Occupied Property, save her extra repayments in an offset account, so when it comes time to buy the new property, the Investment Loan can be at it's maximum, the Owner Occupied loan can be at it's minimum and all is good.

    What did the client do, well, after speaking to her accountant, she sold the unit, used the cash for the Owner Occupied property the purchased another investment property. To sell the unit and buy the new investment property, it cost her about $30,000 which was going to be less than what the other structure would have cost over 3 years.

    That was 8 years ago and we are now just financing her 4th property because she received good advice.

    This sort of structure is not for everyone. A good broker should be able to tell from the A & L position, the savings and debt history of the client whether it is a good way to go.

    But a great number of first home buyers are looking at buying something small to get into the market. They have an idea that they may keep that 1t property as an investment when they upgrade. If they have the self discipline to the save in an Offset Account, this gives them the flexibility to do what THEY want to do down the track. Not what they have been forced into because the ability to take an Interest Only loan has been taken away from them.

    For the right borrower, this is a sound practice and should stay as a facility that can be used.
  • Tim H | 26 Sep 2014, 04:18 PM Agree 0
    Seems not all brokers are cautioning about this strategy. Under NCCP loan must be "Not Unsuitable". In all the cases listed in the comments section this appears to be true.
    Maybe this reflects the changing attitudes and improved knowledge of the market rather than poor lending practice.
  • JW | 27 Sep 2014, 11:56 AM Agree 0
    TONY, Spot on mate, spot on. I see this far to often. IO is a great too when it is appropriate for the client.
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