Interest only loans have been very popular in the last couple of decades, particularly with investors to maximise tax benefits and to give cashflow some relief. Interest-only loans for businesses and owner occupiers have grown strongly particularly in the last decade, because of the more affordable repayments associated with them.
Recent clampdowns by the Australian Prudential and Regulation Authority now requires banks to limit new interest-only lending to no more than 30% of new mortgage offers. Previously such mortgages accounted for around 40% of their loan books. Banks are also required to reduce interest only business finance.
Recent reports show about $120 billion in interest only loans are scheduled to roll over to principal and interest loans year on year, over the next 3 years.
The concern is the loan repayments for borrowers in this situation could jump significantly, making them unaffordable. In a cooling property market this could put significant financial strain on not just home owners and investors, but businesses also, and with the reduced availability of interest-only loans on offer, refinancing may be harder to get.
BUSINESSES NEED TO PLAN NOW
If you have an interest only loan for your business, you may be required to move to principal and interest at your next loan renewal date. This could have a large affect on your cashflow. For example, a business may have taken out a 15 year loan with the bank for $500,000. For the last 10 years, it has been on interest only. There is 5 years left of the loan. Due to the new banking requirements, the bank requires the business to pay back the $500,000 in 5 years’ time. With an interest rate of 5.79%, this would increase the repayments from approximately $2,412 per month to $9,618 per month.
It pays to start planning and discussing your bank’s plans as early as possible and you may even need to refinance with another financier if the loan term cannot be extended. Don’t leave it until last minute, or you could find you have put yourself and your business under a lot of pressure.
Reach out to your trusted PJT Accountant for a confidential discussion and review on your financial situation before any changes to your mortgage become due.