Rate cuts for P&I home loans; interest-only rates continue to climb
Article by Kelly Emmerton
In the midst of rate hikes and tightened regulations for interest-only and investment loans, there is some good news to be found for a different subset of borrower - owner-occupiers making principal and interest repayments.
A number of lenders have cut rates on principal and interest lending, with the biggest reduction of 0.44% from Arab Bank Australia on its 3 year fixed rate offer. Other lenders making rate cuts included AMP, Greater Bank, Newcastle Permanent and iMortgage.
The rate cuts have the potential to save borrowers a decent chunk of their monthly paycheck. According to Mozo’s monthly repayment calculator, on a $550,000 loan over 25 years, the difference between a rate of 4.43% and 4.18% is nearly $80 each month.
Largest recent rate decreases on fixed terms 1-5 years
Although borrowers making principal and interest repayments will be enjoying savings, rates on interest only loans have continued to climb. For example, AMP, which reduced its fixed rate loan by 0.10%, also recently announced that variable rates on new interest-only loans would rise by 0.28%.
Mozo property expert Steve Jovcevski said the difference comes down largely to APRA’s stricter lending regulations and the risk involved in different types of lending.
“Principal and interest loans mean less risk for the bank, because the borrower is gradually chipping away at both the interest and the loan amount over the entire life of the loan. Interest-only borrowing, on the other hand, means the borrower needs to come up with a lump sum payment at the end of the loan term,” Jovcevski explained.
This more “risky” lending has been the focus of APRA regulation changes which limit new interest-only lending to 30% of a bank’s mortgage portfolio.
Jovcevski said that interest-only loans were often best suited to investors, who could sell the property at a profit once the mortgage was paid off. Principal and interest repayments, on the other hand, may appeal more to buyers looking for a family home.
“These loans are structured so that as long as monthly repayments are being met, the entire debt will be cleared by the end of the term. Although it often means slightly higher repayments than an interest-only loan would, in the long run it's a better option for homeowners because they won't be hit with the steep repayments that come once an interest only term ends,” he said.
If you’re ready to break into the property market with a low rate home loan, head over to our comparison table to find some of the best offers around.