With new government rules affecting borrowers, it pays to scout around for a better deal
Lately most mortgage-holders have been getting letters from their banks saying that their interest rates are changing – usually going up – even though the RBA hasn’t moved official rates. So what’s going on?
This year the banking regulator has placed extra restrictions on banks to try to slow lending to investors, hoping to take some heat out of property markets, especially in Sydney and Melbourne. And it has worked – to some extent anyway. Most banks are now charging higher interest on investment-property loans than owner-occupied loans, and more for interest-only loans (favoured by investors) than principal and interest loans.
So an investor who’s on interest-only has likely been hit twice and is effectively paying surcharges for being an investor. Clients are asking what they can do, and our first answer is generally to shop around! We’ve helped some clients find a better deal which even after the recent increases may be equal to or even lower than what they were previously paying. Banks famously tend not to offer their best rates to customers unless the customer threatens to move to a competitor, so if you haven’t gone looking for a better deal, there’s a strong chance you may be paying your bank more than you may need to.
One option is to change from interest-only to principal and interest – this avoids one of those surcharges. However it can result in you paying more every month, because you would then be paying off part of what you owe, as well as interest, so it will affect your monthly cash flow.
The upside is it will save you lots of interest in the long-run and pay off your debt much sooner. Another option is to fix your rate for a period of time, which gives you some certainty of cash flow, but can also make it harder for you to renegotiate with your bank in the future and restrict you from moving the loan prior to the end of the fixed term without a sizeable penalty.
Many of our clients have more than one loan, so it’s important to get the overall strategy right. Debt falls into two categories – either good debt or bad debt. Good debt means borrowing for an income-producing investment like an investment property or shares, the ‘good’ referring to the fact that the interest should be tax-deductible, plus the asset provides you with income through rent or dividends, and eventually a capital gains. ‘Bad’ debts include home loans, credit card debt, personal loans – all which are not tax-deductible, don’t provide income, and don’t lead to capital gains unless you sell it.
Many client’s first priority is their home loan, so we usually prefer to see this be on principle and interest as we like it to be paid off as quickly as possible. Paying your home loan off early can save you thousands in interest! Once someone has paid off their home loan, they often change their investment debt from interest-only to principal and interest, as this should not only get them a better rate, but ideally they want to be debt-free by retirement.
You might be surprised at how much difference the right strategy can make over the life of your loans, so ask your mortgage broker or financial adviser to work with you to build the right strategy for you.
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.
________________________________________________________________________Mark Plaskitt from MLC Advice Pennant Hills has been working in Financial Planning and Mortgage Broking since 2004, helping clients manage their home loans, and investment debts.