A game changing new loan product has been introduced in Australia in the past month.
The product I speak of is a 40-year interest only loan for investment properties and is being offered by AFG Home Loans.
Yes, that’s correct. You can get a loan for 40 years and only make the interest repayments. No repayment of debt.
Traditionally, lenders in Australia will provide a 30-year loan with a five-year interest only period. Meaning after that initial interest only period, you must pay down the loan amount (the principal) over the remaining 25 years.
Naturally, once the interest only period finishes, the total repayments jump up (because you are now paying interest and principal), meaning the cash flow you generate from a property reduces.
Let’s take a $500,000 loan for example.
Assuming an interest rate of 6 per cent, the change from interest only to principal and interest would amount to an extra $167 per week – or $8,664 per annum – in repayments.
A property investor with a $500,000 loan can potentially through this type of loan, suddenly have access to an extra $8,664 per year in cash flow or net income.
That means a property investor with four such properties could have access to an extra $35,000 per year in cash flow or net income.
That’s more than the pension.
What’s the catch?
You pay a slightly higher interest rate. Like all loans the interest rate is different depending on when you apply for the loan. At the time of writing, it is roughly 0.5 per cent higher (currently 7 per cent per annum) than most other interest only loans.
Even factoring in the extra interest cost, your repayments come in $500 per month – or $6,156 per annum – less than the repayments on a principal and interest loan.
Borrowers need to be 50 years or older, the loan to value ratio can’t be more than 65 per cent and the maximum amount you can borrow is $2 million.
At the end of the 40 years, you pay back the loan – by either refinancing or selling the property.
It makes sense if you’re the lender. You’re lending to people with plenty of equity, in an asset class that is ‘safe as houses’, and getting a better return on the money loaned out than other banks are getting.
It won’t be for everyone – likely most suited to people who have already built their portfolios and are entering the latter stages of their careers, or even retired.
But it certainly has a place in our property investing strategies, if not in the ‘right now’.
I’m thinking it won’t be long before most other lenders in Australia are offering a similar product.
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