How blends of principal and interest can work in the short-term

Lenders have been put in a tricky position of late, and investors can take advantage of this. In an article some weeks back, we explained that the federal government is facing pressure to make housing affordable for first home-buyers, at the expense of property investors. It sought to do this by increasing powers to our banking regulator, APRA (Australian Prudential Regulatory Authority).


With these new powers, APRA has instructed banks to lower their LVRs (lending-to-value-ratios) and limit the number of interest-only loans on offer. This means fewer interest-only loans available to property investors. But shrewd investors can make this work for them.


Banks are responding to new APRA regulations by offering new loan products that are no longer interest-only, but in which the investor is paying back a small amount of capital. To make these products attractive, banks are inviting property investment customers to switch from existing loans to principal-and-fixed-interest loans with significantly lower monthly repayments. This way, the banks can appease APRA while keeping property investment customers on their books.


The key is to determine whether these loans are more attractive from a long-term perspective. Recent political pressures around family trusts, negative gearing and home affordability continue to make the property game even more challenging, but it can also open new opportunities for clever players to negotiate.