Traditionally when purchasing an investment property it was recommended that customers chose an Interest-only loan. Generally, people chose this option as the repayments were lower, leaving them with more cash to invest elsewhere or put into their principal home. Another advantage of the Interest-only loan is that it’s far easier to calculate the amount that can be claimed as a tax deduction. This is because the whole payment is clearly identified as an interest payment.
However, things have changed since the Australian Prudential Regulation Authority (APRA) clamped down on interest-only loans in a bid to cool the hot property market. There is a now a significant difference in the interest rates that banks are offering for investment debt. The interest-only packages are higher than the principal plus interest packages, in some cases as high as a 1% difference.
So, which strategy is best for property investors now that Interest-only loans cost significantly more than others? Macquarie analyst Victor German crunched the numbers and estimated that a person in the top tax bracket with a $500,000 investment property loan would be about $6000 better off after five years, if they switched from an Interest-only loan and started paying back principal.
Overall, it’s worth coming in and having a chat about your investment loans. With the interest rate difference, you have a choice of staying on Interest-only and getting charged more interest OR changing to Principal plus interest and reducing your interest bill. Although, sometimes this means paying a slightly-higher repayment, the difference ends up in your pocket not the banks.
