I have moved closer to work and rented my home and using it as an investment. If I transfer my loan from principal and interest to interest only is it likely my rate will increase and by how much?
Also, I had to pay mortgage insurance previously, will I have to pay it again if it’s interest only?
The direct answer to your questions
-Yes the interest rate will change (how much? it depends on which lender you are with)
-Do you have to pay LMI again? This depends on whether you are going to stay with the same lender or you will be considering different lender options.
If you are considering different lender, than the question is how much has your property value increased by since you purchased. If the value has gone up to cover the 20% and bring the Loan to Value ratio down to 80% than you don't have to pay LMI.
Also to consider if Interest only is the right option for you, yes your cash flow will be low initially however, over a period of time you end up paying more to the lender.
There is no direct answer to your question as it all gets down to your personal situation. In my opinion get a trusted adviser who can guide you and help you to get into a product that suits your lifestyle. I would be more than happy to sit down and guide you in the right direction.
0450 237 787
There a various options available to you but as mentioned above it does depend on your situation. Happy to have a chat or come out and see you at a suitable time for you.
Please don’t hesitate to contact me on 0401586901 at any time.
In our current finance climate there are different rates for interest only and Principle and Interest lending.
Banks now need to justify the amount of interest only lending they provide and so they load the Interest Only lending rate to reduce their exposure.
Interest-only loans typically have a maximum period of 5 years after which they revert to the normal principal and interest repayments. (This can be renegotiated with some banks for another 5 years).
If you are paying interest only, you are not reducing your debt but simply servicing the interest payment and therefore over the term of the loan, more interest is paid.
However, investors pay interest only generally because this is the tax deductible portion of the loan repayment and you should seek your accountants advise to ensure this suits your situation .
Comparing a $300,000 Interest only to Principle and interest loan; if I just use the example of a St.George investment loan you would pay 4.19% for Principle and interest lending and 4.89% for interest only lending. This results in approximately $240 a month less for Interest only (however you are not reducing your debt). I would consider reviewing your rent received and choosing to pay off your loan when it is only costing another $60 a week to do so. In the long run, it's a better option. My investment properties are all principle and interest for this reason.
In regards to Lenders Mortgage Insurance:
LMI is paid once at the commencement of a loan. It is paid when you lend more than 80% of a property's value.
If you are converting a loan to Interest only, you are simply doing a variation to your current loan and therefore would not pay mortgage insurance again. However, if you refinance and your loan is still in excess of 80% of the value of your property you will pay mortgage insurance again with your new financial institution.
(There are sometimes exceptions to this rule with some banks based on profession. Doctors for instance may lend more without paying mortgage insurance due to their risk profile).
I hope this helps.
You can always contact me for more information.
If you have not already done this, please get some advice on the taxation side of things......you need to make sure you are getting the best bang for your buck on the property in your tax return....including perhaps depreciation on property improvements if it is a viable option. (it depends on when the dwelling was constructed and when any significant renovations were done)
Also you need to file away some critically important information pertaining to Capital Gains Tax......and the best thing you can do here is find someone who knows their stuff and sit down with them to go through the CGT implications of what you are doing.