In response to the Australian Prudential Regulation Authority’s (APRA) recommendations, banks have recently changed their position on interest rates for investment properties and interest only loans.
For instance, having interest only (IO) loans are more expensive than principle & interest (P&I), while investment loans are now more expensive than owner occupied loans.
Previously, there would be a single rate for all loans, there is now a list from least expensive to most expensive in the following order:
On top of that, banks will price interest rates further based on:
It also depends on the long term usage of the property, and the potential tax deductibility both now and in the future.
In some cases, you might even be paying a loan based on incorrect property classification (if you’re living in a property that used to be a rental, it might still be classified as investment or if the loan was incorrectly written to begin with).
Now is the perfect time to get an understanding what property you want, the usage and then decide whether paying interest only is worth the additional interest, and then deciding the long term tax deductibility effects of paying down principle.
It’s no longer a simple case of going for what’s cheapest, it now takes care and effort to find the right solution for you both now and in the future.