Why it’s a good time to consider interest only investment loans
Over the last few years with interest rates at record lows, higher rents and a strong property market, many of our clients have bought investment properties to add to their portfolios.
It has been quite common for them to have principal and interest repayments on both their owner occupied home loan as well as the investment property loan.
In this situation they reduced their debt on both their loans.
We were able to get them lower interest rates as principal interest gets you a lower rate than interest only.
And under the market conditions, it has been manageable for most people to meet all their home and investment property loan repayments, without additional out of pocket payments.
A lot of people found with the low interest rates and the rents that their properties were cash flow positive which meant that they were basically paying for themselves.
This is changing…..
This strategy is for you if you have an:
- Owner-occupied home loan; AND
- Investment property home loan; AND
- You are paying principal and interest on both loans; AND
- You are coming off interest only in the next 4 – 6 weeks and need to renew it.
- By making your investment property loan interest only, can you reduce your loan repayments on the investment loan
- Keep your owner occupied home loan principal and interest.
What I have found after talking to some of you is that you are starting to say..
Hey look, I am fast forwarding to when we have had more rate rises.
I’m concerned about our ability to make repayments across all my properties.
Do I need consider some financial and lifestyle changes?
A strategy you can follow right now, is review how many rates rises you can take before your property becomes cash flow negative.
Alternatively, understand at what point you can no longer afford the additional out of pocket contributions to meet your investment loan repayments.
You can also listen to this on you tube if your prefer.
Let’s get into it.
How does an interest only investment loan help?
You may currently have your home loan, plus an investment property loan (or three).
As interest rates go up, then it could put you in a much more difficult situation.
So, what does that mean?
It means that the rent coming in, is no longer covering all of the loan payments, whereas originally it was paying for all of it.
Now you are having to put some money in yourself.
Our clients have noticed that all of a sudden, their property has gone from cash flow positive to cash flow neutral or turning to cash flow negative.
One option you can have, is to keep your owner occupied home loan as principal interest.
Then you can change your investment home loan to interest only for a period of time.
What is the benefit of an interest only investment loan?
The main benefits of an interest only investment loan are that:
- Loan repayments will drop considerably, sometimes by almost half from converting from principal interest.
- The interest is tax deductible.
How long can you have an interest only investment loan?
The options that you have for this is you have got from 1 through to 5 years.
We generally recommend that people do it for a longer period of time, more the 3, 4 or 5 years.
We steer our clients to the longer period as you might need longer than you think and it’s much easier to change from interest only back to principal interest if you want to early than the other way round.
So if you think it will be something that helps, as it reduces your overall household expenditure quite a bit and frees up your cash flow, please don’t hesitate to get in touch.
My name is Victor Kalinowski and I’m a mortgage broker at Blackk Finance, with offices based in West End (Brisbane) and Burleigh Heads (Gold Coast). If you’re interested in getting in touch for some advice, book a call instantly at a suitable time or call us on 07 3122 3628 today.
The information contained within this page is general in nature. It serves as a guide only and does not take into account your personal financial needs. Before you act on this information you should seek independent legal and financial advice. Copyright Blackk Finance 2022.