Interest Only Re-set
There has been much talk in media outlets, and political interest parties, about the trend of Interest Only Loans reaching expiration. Much of this discussion has been led by parties for or against the proposed “APRA Bill” – summarised as altering and extending the tools at the discretion of the Australian Prudential Regulation Authority for crisis management of the financial services industry, including banks and insurance providers.
Regardless of opinion on the APRA Bill, there is something to the Interest only speculation that requires consideration.
Do the numbers add up?
Let’s focus on the averages provided by the Australian Bureau of Statistics (“ABS”).
The ABS Dwelling Price Index (March 2017) states that the average new loan for the 8 Capitals of Australia is $375,000.
ABS Average Weekly Earnings (May 2017), Full Time Employee on Ordinary Time is $1,543 = $1,172 average after tax earnings.
Some number crunching on the ABS averages:
Interest Rate: 4.39% (Variable Rate, NAB, January 2018)
Term: 30 Years
Interest Only: $317 per week
Principal and Interest: $433 per week
Difference: $116 per week
Not always 1 + 1 = 2
The scaremongering is trying to promote that there are millions of interest only (“IO”) loans that are about to be changed to Principal and Interest (“P&I”), which may lead to a Household Mortgage Crisis, or whatever title the media will assign the impending catastrophe.
As with all estimates, the numbers may not tell the full story, or even close to the Average Australian mortgage story.
The number crunching above is based on averages and assumptions. Even the Mortgage terms, and interest rate can differ depending on personal circumstances.
The reality is, yes… interest only mortgages did increase between 2013 and 2017 (APRA). In the latter part of that trend, banks were discouraging the practice for New Mortgages by increasing the Interest Rate on IO Loans to P&I, so this trend is likely to not continue.
Based on the values of these mortgages and with the time period for these loan changes to be over several years, Global Financial Services firm, UBS, predicts the impact to be minimal, with some cascading effects due to decreased disposable income expenditure.
Having said that, the number crunching does highlight that the ‘average’ Interest Only Mortgage Holder, will be required to find an extra $116 each week to cover their loan with a change to Principal and Interest. For most mortgage holders, the amount will likely not be that high, but extra money will need to be found.
In a nutshell…
If you do not know if this will impact your hip pocket, check the terms of your mortgage, today!
If you have a P&I mortgage already, continue paying above the minimum to prepare for when interest rates do inevitably rise.
If you have an IO mortgage, chat with your bank about when the term expires and what will your new repayments be. Do some number crunching to determine how this will impact your household and what alternatives you may need to consider – refinance options, extra income, decrease expenses.
We always recommend the importance to know what is going on with your money, plan ahead and take action. Most importantly, if you are concerned, SPEAK UP!
As the Barefoot Investor would say, call the bank and ask them to sharpen their pencil.
Speak with Wall Business Services, or a financial or personal counsellor for advice before making any decisions that you are unsure of.