Does IO Loans affect future borrowing capacity?

[Raja]

Hi All,

I am in the process of setting up an IO loan with an offset account for my first PPOR. I was looking to get the maximum length on the IO term of 10 years with ANZ, however the ANZ broker advised that having such a long term with IO would reduce my future borrowing capacity.

Would this be true? As I thought the opposite would be true, as in having a long IO term should increase my future borrowing capacity.

Regards,

Raja

 

[pobrien3]

Hi Raja

At ANZ I/O loans will reduce your borrowing power strangely enough. Instead of servicing your loan over 30 years ANZ will service your loan over 30 years less the interest only period. So in your case in their serviceability calculator they will calculate your repayments on the new loan based on a 20 year loan term (30 less the 10 year I/O period) and using their inflated benchmark rate (which I think is about 9.57% p.a. at the moment less any package discounts you are getting). Obviously the monthly repayment on a 20 year term is larger than that on a 30 year term and therefore your borrowing power decreases.

Most other lenders won't penalise you in this way. So it means that although you may run out of capacity at ANZ at some stage in the future there may be a number of other lenders that will come to the party.

Cheers

Patrick

 

[Raja]

Excellent thanks for the information Patrick.

 

[Rolf Latham]

Hiya

ANZ as Patrick said, are a funny lot, but take an LOC with them and they assess over 30 years

BUT many other lenders take actual of other banks debts, SOOO the IO is almost always beneficial in the longer term.

ta
rolf