Borrowers opting from interest-only to P&I loans

by Madison Utley17 Sep 2019

A non-major bank has recorded a notable increase in customers switching from interest-only to principal and interest (P&I) loans — before the five-year deadline upon which they are required to make the transition.

AMP Bank charted a 14% increase in the number of existing home loan customers switching from interest-only to P&I since the first round of rate cuts in June.

“The recent rate cuts have put more money in the pockets of homeowners, and we are seeing a significant uptick in the number of those customers opting to pay down their debt with the extra funds that they have,” said AMP CEO Sally Bruce.

“Whilst interest rates are at record lows, there is no better time to pay down debt to own your home or investment property sooner. Homeowners are sometimes unaware of how powerful extra repayments can be – those who are able to increase their repayments now will pay less interest over the life of their loans.”

Average interest-only home loan rates are currently 50bps higher than P&I rates for owner-occupiers, according to the latest Reserve Bank of Australia rate data for June.

“Switching to principal and interest will cost homeowners more in the short term, but over time the customer could save thousands of dollars in interest as a result of paying off their debt sooner,” said Bruce.

“These decisions always come down to a customer’s personal circumstances and capacity in their budget, but if their situation allows it, the short-term pain may be worth the long-term gain.”

If a homeowner with an average 30-year $400,000 home loan (first five years interest-only and remaining 25 years P&I) were to switch over two years early, it would initially cost an extra $517 per month. However, they would save $14,711 over the life of their loan as a result of paying down their debt earlier.

For a 30-year $700,000 home loan (first five years interest-only and remaining 25 years P&I) a customer switching two years earlier would initially pay an extra $904 per month, but would save $25,7441 over the life of the loan.

With the same parameters on a $1,000,000 home loan, borrowers switching to P&I two years earlier would pay an extra $1,291 per month initially, but would save $36,777 in the long run.