Today, the Reserve Bank of Australia decided to leave official interest rates on hold, making it 12 months since they cut rates to the historic low of 1.5%. Despite this, we are still seeing constant interest rate changes from banks, particularly around loans with interest only repayments.
This brings us to a common question I am being asked at the moment – “Should I stick with interest only repayments, or is it cheaper to make principle and interest repayments?”
On average, interest rates for investment loans with interest only repayments are around 5.2%. In comparison, we have access to lenders offering investment loans with principle and interest repayments at a rate around 4.25%. As an example, let’s assume a loan balance of $400,000. After three years, although the combined principle and interest repayments are around $8,400 higher than interest only repayments, you would have paid off over $21,000 of the loan balance where the repayments were principle and interest. Food for thought.
We always encourage you to discuss any such change with your accountant as it may affect your tax strategies. If you would like me to complete a similar comparison for your current loan(s), please feel free to get in touch with me.