Should I change my loan repayments from Interest Only to Principle and Interest?

As you are likely aware, the last six months has seen a sharp rise in interest rates for Interest Only (IO) Loans. This has been particularly prominent for Investor loans, but there were also market increases in the Owner Occupied (O/O) market also.  If you had an Investment / Interest Only loan you were doubly hit!

The regulators are trying to rebalance the books after growing concerns about Australians household debt levels.

At Scarlett Financial, for the best wealth accumulation strategy, we would normally recommend Investment Loans are Interest Only.

However, these recent rate rises have has had us reconsider this line of thinking.

In short, here’s the philosophy we are the recommending in our client scenarios (in the norm):

  • Owner Occupied loans should always be P&I as this is non-deductible debt (unless there are extenuating circumstances for it being IO – e.g. one partner on maternity leave and cash flow is needed, etc)
  • Investment loans should generally be Interest Only, especially where the client has Owner Occupied debt, as the client should be focused primarily on paying down equity in the Owner Occupied property.
  • If you have an investment property but don’t have any Owner Occupied debt, we would normally still recommend keeping at Interest Only, however the recent rate increase in this market means there is now value in paying Principle on your Investment loan and  client may not notice a significant cash flow difference. It’s something we are encouraging  our clients to consider.

To assist, Scarlett Financial is offering a free review of your debt situation in regards to repayments methods to see if you would be best placed making a change to reflect the current market.

Please email our team at lending@scarlettfincial.com.au if this interest you and we will book in some time.

Contact us today to have a no-obligation discussion about how we can help you

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