A client came to us to see if we were able to provide alternatives to the situation she was in with her bank. She had tied everything together with one bank and had circa $3m of lending against 5 properties, including her own home. Her overall LVR position was very low, as the total property value was $6.5m. This client’s debt was split over 4 different loans, all on interest only and all on circa 4% lending – so interest costs of $120,000 p/a, or $10,000 per month. This client’s rental properties, and the minor dwelling on her home actually generated in total $175,000 per annum in rent which more than covered her outgoings.

Naturally she decided to ease back on the work front and so her income (when re-assessed by the bank through their stress-testing methods) meant that she wasn’t meeting the new criteria, and so the banks weren’t so willing to allow her to continue her interest only payments which were coming to an end in 2 months’ time – which would’ve totalled 15 years of interest only. In addition to this, her fixed rates were expiring at the same time.

What people seldom realise is that the interest only period actually eats into the loan term, so an original 30 year loan term meant that she now only had 15 years to repay her total principal off, due to the fact she had had 15 years interest only. In addition to this the lender wouldn’t let the client re-fix their lending and they had to go on a floating rate of 5.65%.

This meant her $3m in lending which was currently costing her $120,000 p/a on a 4% interest only repayment type/rate, was in 2 months about to become payments of $24,752 per month, or $297,024 per annum based on $3m lending on a principal & interest basis at a rate of 5.65% – more than double what they were before, and a lot more than what her rent would be able to cover!
 

Lessons:

1. Split your lending up with different banks
2. Understand that the longer you have interest only, the less time you have to repay principal
3. Review your interest only terms and expiry dates
4. Extend your loan terms if this is suitable for you

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