Most of us have heard that all good things must come to an end, and interest only loan terms are no different. Banks want you to start paying off your mortgage at some point, and under the Responsible Lending Code are actually obligated to encourage and ensure that you do this.
Previously, the interest only option was very popular, particularly amongst property investors, mainly because any interest was tax deductible. This essentially allowed investors to build up equity in their portfolio without it significantly impacting their cash flow, as the rent would cover at least the interest (if not both the principal and interest payments) while reducing their overall tax bill across all income sources. They would then put all their money into paying down the mortgage on their personal property. In October 2021 however, the Government started phasing out tax-deductions on investment properties, making this strategy much less favourable. There are however, some customers who still want to continue with this approach for the following reasons:
- Investment properties purchased before March 2021 will still receive some tax benefits through to the 2025/26 tax year.
- There’s a chance the interest on investment properties may become tax deductible again with a change in policy, or a change in government. If that happens, having the majority of your debt on investment property will maximise future tax deductions.
When we’re in a rising interest rate environment like we are now, getting stung twice with coming off a low interest rate AND coming to the end of an interest only term can be overwhelming!
For instance, if you have a loan of $750,000 on 2.49% and you’re now refixing at say 5.99% - your interest payments have more than doubled from $1,556 to $3,743 per month! And that’s just the interest only payments. If your loan switches to principal and interest, and assuming you have 27 years left on the term, your repayments will now be a sizeable $4,675 per month!
The takeaway message here is DON’T GET CAUGHT OUT and leave it to the last minute! Speak to a Buddy adviser before your interest only term expires so we can run you through your options and come up with a solution that suits you best - whether this be extending the term if needed, or reassessing your options to take advantage of one of the many cash back incentives that banks are currently offering.
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