Jason here, thanks so much for reading!
We’re all wondering what 2023 will bring us, knowing that 800,000 fixed-rate loans will expire this year, meaning most borrowers will see their interest rate double, overnight.
But as concerning is the huge amount of Interest-Only loans that will do the same. You see, when you take out a 5-year interest only term, after that 5 years, the variable monthly repayments will be then based on the remaining 25 years, of the original 30-year loan term.
My client Dr Claire is in this boat. She’s on a great interest-only fixed rate that will, thanks to yesterday’s extra rate rise, go from 2.49% to 5.24%. This is what her current repayments look like, and what they’ll look like very soon;
That’s nearly 250% more! And many poorly represented borrowers will be paying much more than that!
Many investors have funded their investment properties with I.O loans in order to keep their ‘good‘ (tax-deductible) loans at the same level, so they can more quickly reduce their ‘bad‘ debt (non-deductible home loans relating to the PPOR/ home). This makes sense sometimes, but it’s prudent to understand what happens afterwards, to prepare.
In the case of Dr Claire, it’s not the end of the world as we originally set up an Equity Facility, which is full in offset, so she has access to plenty of funds to meet financial commitments, if for a short time that’s required.
Bankers rarely suggest that borrowers unlock equity to have funds available if required in the future; financial institutions need to keep cash reserves for every limit in place. In short, unused equity facilities actually cost banks money.
Often, your bank won’t tell you what you need to know
Tina and I recently took the kids to see The Tempest. OMG Richard Roxburgh was incredible – you know, the bad cop in Blue Murder, The Duke in Moulin Rouge, and Rake in the hilarious ABC series. Anyway, in an attempt to make my boring finance-talk more graceful, I embraced a little Iambic Pentameter just before, to make my words dance a little ~
When arranging finance, us brokers and bankers assess applicants’ Capacity (whether they can afford their repayments) by allowing for a 3% buffer on actual rates, in case they rise; we then account for living expenses and just need a $1 surplus to approve the loan.
Well, you might see the problem. Rates have now risen by 3.25%. So those who maximised their lending last year, would not quite qualify for the same amount now. They’ll be prisoners of their bank, now that servicing calculators won’t give them the option of refinancing.
The best interest rates are of course reserved for new-to-bank customers, where borrowers also get paid cash rebates for making the switch. In Shakespearian terms, you need to switch to save and get ahead.
For those in the boat of not being able to refinance, please call your bank this week and let them know you’ve been offered a $4,000 rebate and a much better rate to leave them. See what they can do for you! PS there’s no need for them to know that you’re actually stuck with them, let’s keep that a secret 🙂
To those of you on fixed rates, great, enjoy them while they last! But I’d sure like to hear from you around 8 weeks before the fixed rate expires, so we can go through the best variable rates and refinance rebates around… and, after getting valuations, improve the structure of your lending.
At the same time, we can calculate your Capacity in case you wanted us to organise a pre-approval, so you’re ready to pounce for when the right place pops up in this cooling market ~
Personally, I don’t think the RBA has given the rate rises a chance to work and may be over-stepping it a little. I think the shock we’ll feel when coming off fixed and I.O loans, combined with the cost of living these days, will jolt our economy in reverse. Who knows, later in the year we might see interest rates actually coming down, but for the wrong reasons ~
Coming Up: Refinancing business loans into housing loan products, In-species non concessional contributions to facilitate SMSF acquisitions and what is changing, Qantas Points maximisation, Lifetime Cap for Small Business Tax Concessions and when they disappear, How to name your children, Secrets to avoid Land Tax and What to look for when it comes to buying Commercial property