Video Transcript: Interest-only home loans for owner-occupied purposes.
It’s a really hot topic at the moment, in the media. A lot of changes have happened in the industry, over the last 12 to 18 months. And interest-only loans, particularly for home owners, has been a topic that’s right at the top of the agenda in the financial sector, and particularly with the financial regulator apparatus.
So I thought it was a great opportunity just to talk a little bit about those types of loans, and when they might still be suitable for someone to take them out. And in my business, I’m getting customers come through, wanting some information around it, so they can make an informed choice to see if it is suitable, given their particular circumstances. ‘
I would just talk a little bit about the types of scenarios that might still be suitable for someone to consider interest-only.
Now the first one is if someone was gonna buy a house to live in, and the intention for that property over the next couple of years or so would be to convert it to an investment property.
Interest-only could be quite beneficial, because the debt can be preserved when it is converted to an investment, and that then could potentially become tax-deductible. While it is interest-only, you can still get some benefits by having any savings you have in the offset account. Because the repayments are gonna be lower on interest-only, your capacity to save faster is gonna be there, so you can bank more money into that offset account, getting the benefit of lower repayments each month on your interest-only loan.
Having that debt preserved and highly likely a high deposit, when it comes time to purchase the next property. There still are a few other things to consider. There’s probably gonna be an interest rate differential between a principal and interest facility versus an interest-only facility.
That’s quite common at the moment. So that needs to be taken into account. Do the analysis on that, and if there is a premium to be paid on the interest-only facility, is that still something that’s acceptable to you, and do you feel you still get a benefit from it?
The other scenario which comes up quite a lot is people wanting to build an investment portfolio. So going to an interest-only loan for the home loan could free up some capacity to take on some other debt; to fund some investments. That could be a very suitable use of taking up that interest-only facility, to free up cash flow each month, to then divert that cash flow into those other assets.
Now, again, a lot of the time, when this is being considered for clients, they haven’t made the purchases yet, so the final cash flow outcomes aren’t known. So going interest-only can provide a level of comfort for them, while they’re acquiring these other assets.
When the final cash flow numbers are known, and the investments are in place, if things are travelling well and there is still some surplus cash flow, you’ve got good buffers in place, then you can always look to turn the home loan back to a principal interest facility. And that’s a really important point to make.
At any time you’re on an interest-only loan, particularly if it’s a variable rate loan, there’s no reason why you can’t convert that to a principal and interest facility, and in most cases, to a fixed rate. That would also be possible. So you have really all of the flexibility that interest-only can provide, but also you’re not locked into a loan that you can’t change, should you want to.
Now the other time that clients would look at requesting interest-only is, they might come to me and say “look, I just want to manage my money on my terms.” For people that are really financially astute, very disciplined, I’ve seen that yield some wonderful results over the years, where clients are more focused and motivated by saving money, so growing money and savings in their offset account, as opposed to just focusing on debt reduction.
If you are disciplined, and that is something that, by you focusing on it, is going to enable you and motivate you to save, then that could also be very suitable. And all of that money you direct into that offset account is then available for you to do whatever it is that you need to do, going forward. And whether that’s using it for personal use if you want to make upgrades to the home or buy a car, it then can become available for investing.
So even though we do hear a lot of negative press and negative commentary around interest-only loans, I still feel that for certain borrowers, they are a credible loan type to be considered. But they’re not for everyone. And they should be seriously considered, if you are thinking about taking one out. I certainly wouldn’t rule them out as a no-go zone for owner-occupiers, but, in the same breath, it might only be a small percentage of the population that should seriously consider them, that can use them for beneficial purposes. So I hope that’s sort of been helpful.
I encourage some comments or discussions or questions around it, more than happy to answer them. And look at certainly a topic that I think’s gonna be high on the agenda for some time yet. Okay, good on you.