The big banks and the second-tier lenders are desperately trying to increase the number of owner-occupied principal and interest (P&I) home loans to meet APRA requirements, so much so, that they are offering massive discounts on interest rates.
Interest rates from 3.69% for owner-occupied P&I
Home owners are set to benefit from interest rates like 3.69% for owner occupied P&I which have just announced by a second-tier lender. This offer is available for new P&I loans of $150,000 or more with LVRs of up to 90%, however it’s not available for pre-approvals, investment, interest-only, construction, or non-resident lending.
With so much competition for the owner-occupied P&I market, big banks and second-tier lenders are advertising all time low interest rates. Lenders are also offering further discounts to the mortgage broker market in an attempt to capture more market share.
Why do owner occupied P&I mortgages get cheaper interest rates?
The Australian Prudential Regulation Authority (APRA) has recently initiated additional supervisory measures on interest-only residential lending and placed a limit on the number of interest-only loans each lender can have in their portfolio. So, if lenders can’t increase their revenue from the interest-only market, they need to boost their volume of P&I loans.
Also, P&I repayment structures for owner occupiers is lower risk to the lender as the borrower is paying down the principal amount on the loan, not just the interest. This means equity is being built by the borrower and should property prices decrease, the actual loan amount is decreasing, leaving the lender less exposed.
P&I repayments almost as cheap as interest-only
Interest-only repayment structures are popular because the repayments are lower than a P&I structure, however now that P&I interest rates are generally much lower than interest-only, borrowers are able to lower their monthly repayments and make headway on their principal loan amount.
Let’s compare P&I and interest-only repayments from the same lender.
In this case, dealing with the one lender and having to choose from a small selection of products, the P&I repayments are only $51 more per month than an interest-only loan. This shows a saving of $674,162 in interest should you hold the loan for the full 30 years at the same interest rate. Even if the borrower only kept this loan for 7 years, the comparative saving on a P&I structure is $96,379 in interest.
You can see the direct benefit of paying principal and interest from day one in the graph below (green), whereas the blue line represents the interest-only period being set at 5 years, then reverts back to P&I.
What is an amortisation schedule?
An amortisation schedule allows borrowers to see how their P&I repayments are split between the principal and interest components, and how the balance is reduced over time. After just 1 year (12 monthly repayments) the loan balance would reduce down to $686,995. Whereas on an interest-only repayment structure, the loan balance will always remain at the original amount of $700,000.
One of the benefits of working with a mortgage broker rather than a bank directly, is the ability to compare multiple products from different lenders.
Are interest-only interest rates still cheap?
The good news is, not all lenders are making drastic changes to interest-only lending. If you’re willing to move away from the big banks and consider second-tier lenders, there are still great low interest rates for interest-only repayments on owner occupied properties.
Whilst lending options have reduced, second-tier lenders are still offering competitive interest-only interest rates for owner occupied properties, starting at 3.78%.
Now is the time for home owners to consider P&I repayments if possible. There are also very competitive fixed interest rates to alleviate any concerns of fluctuating interest rates.