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From the desk of our Finance Manager, Matthew Kerr
Well it’s been an extremely busy start to the year for our finance team as we continue to save our members huge amounts of interest by reverting their repayments from interest only to P&I. This is born out of APRA’s desire to see interest only lending in Australia not make up more than 30% of our banks loan books.
The result has been that banks are encouraging borrowers to make P&I repayments simply by making the interest rate a lot more attractive on these types of loans. We are in a lot of cases, seeing an interest rate saving of 1 – 2% p.a. by making the switch from interest only to P&I.
This is bringing back competition in the banking sector as well as we see lenders outside of the major 4 offer some very attractive deals. This is due to the fact that they are more easily able to meet the demands of APRA as they are working off a lower base (based on their loan book size) whereas the major banks are limited in their pricing based on the fact that they have more work to do meet APRA’s demands. In essence the smaller lenders have a bit more freedom to lend and are doing so with some extremely attractive offerings.
When we are discussing the switch with our members we work through some specific sets of numbers, including;
- How does it change your repayments?
- How much interest do you save?
- How much does your debt reduce over time by going P&I?
- We then look at it as a “return” – i.e. If your repayments are going up, then how much is your debt reducing by from the increase in your repayments and therefore what return are you getting by putting a bit more towards the loan……the results have been staggering!
Real life example
I am working with a couple at the moment who have a nice property portolio and plenty of equity and a great income who are currently making interest only repayments on all of their investment loans. This has always been the recommended type of repayment option on their investment lending.
Their interest rates have gradually crept up over the last 18 months to a point where we are able to save them up to 1.51% p.a. on some of their loans.
The results from their review were as follows:
- Repayment change – Increase of $337 per month
- Interest saving per annum – $22,518
- Debt reduction over first 3 years – $81,911
- Return on investment – Extra repayments over the first 3 years $12,132 for a return (in the form of debt reduction) of $81,911. ROI = 675% (note that is a 3 yr return as opposed to an annual return)
These are huge numbers and this is why it is extremely important to be constantly reviewing your lending as part of your overall review with your adviser.
The lending world is constantly changing and if you aren’t reviewing your lending at least once are year you are quite simply costing yourself money.
I look forward to chatting with you and saving you money on your next review