Thousands of WA mum and dad property investors face substantial financial pain unless they take steps now to prepare for the end of their interest-only loans, a leading Perth mortgage broker has warned.
Director of White Knight Finance Steve Vicary said his firm had seen a significant jump in inquiries this year from investors whose five-year interest-only loans are due to expire soon.
“At the height of the property boom, thousands of WA mum and dad investors took out five-year interest-only loans,” Mr Vicary said.
“As a result of the clampdown on interest-only loans that was introduced to slow down the property bubble on the east coast, WA mum and dad investors are now finding it harder to get these loans extended.
“Most will have no option but to go onto a standard loan, paying principal and interest. On a loan of $400,000 at 4 per cent interest, that equates to almost $800 a month extra in repayments every month.”
He said this could be a problem.
“It can be a rude shock when you have to start making bigger repayments. In some cases, investors can get a new interest-only loan. If you can’t get an extension, you might have to apply for a new loan and that means your finances will be closely scrutinised by lenders.”
Mr Vicary said that following his three-month “good behaviour” rule is a good idea.
“Three months of being disciplined about your spending can give you a huge leg-up in being able to refinance your loan and avoid being hit with a financial burden.
“But bear in mind that some lenders will even look back to six to 12 months. Don’t wait until the last minutes, do your homework and get professional advice as soon as possible.”
1. Follow a budget
Create a budget to track your income and spending, cut back on unnecessary spending and increase savings where you can.
2. Increase repayments
Lift your regular repayments or make one-off extra repayments to create a savings buffer.
3. Pay more often
Switch from monthly to fortnightly repayments to save more.
4. Avoid using credit
Cut up your credit cards or reduce your limit and pay with cash.