Paul Glossop: Welcome again guys to Pure Property Investment one on one. I’m here today with Scott Le Quesne. Scott is the principal of Aussie Home Loans in Paramatta and Rouse Hill. Also, as far as I am aware, the industry leading franchise around the country from a home loan perspective. Little plug there, no money exchanged.

What I wanted to talk about today and something is actually quite topical for me personally in my own portfolio is, looking at right now with the ever-changing credit environment, principle and interest versus interests only loans and how they I guess the really dichotomy of the amount or the rates that are offered for either or and how they can reflect on the investor. And what’s important and what are some of the things that people need to consider because the differences are vast compared to what they were even six months ago.

Scott Le Quesne: Yes. Look it’s an interesting time when we talking about interest rates at the moment you can pick up the paper and it says “ NAB has dropped rates” and then so at one hand they dropping principle interest own occupying rates by three points and then on the other hand they lifting rates by 30 points on investment interest only. So, it’s a really interesting market with the rates at the moment and I think it’s important to understand why the banks are moving their rates around and what’s happening.

So basically, the banks are being forced to hold only 30% of their total loan books as interest only loans. They all running at about 40%, at the moment. So the banks are being forced to drop a percentage of their interest only loans converting them to principle and interest. So what we finding is, rates for interest only loans are going up to make them less attractive and often principle and interest rates are coming down. So the banks are trying to get people to swap over or certainly encourage people to swap over or think about it the principle and interest options. So, I guess from an investor point of view, traditionally we’ve always said “Interest only is the way to go”. It’s actually interesting now to do the maths for people to say “Okay, principle and interest I can actually get this rate, if I’m looking at interest only I’m paying this rate”, so it’s still working out more expensive obviously doing principle and interest.

But it is starting even with investors to make the effect of dropping that 10% down that the banks are after by you know making it feasible for an investor to say, “Look principle and interest is 80 points cheaper you know potentially I should look at doing that even though I’m an investor”. But it’s a no brainer for principle and interest loans on owner occupied properties. Certainly that’s bad debt that you want to reduce down and you getting the best possible rates occupied, principle and interest so certainly that’s the way to go and it’s an interesting discussion with investors now say here’s the principle and industry payment versus the interest only repayment.

Paul Glossop: Yes, it’s most certainly an interesting time. And I think if you can, again going back to your cash flow modelling, if you can you can sustain a small hit. Remembering if you are going negative into your entire portfolio over a year than anything negative is going to potentially be tax deductible, but second to that I mean like you said potentially 80 points difference for an PNI versus an interest only loan of an investor. You talking though the potential going to a three or a five fixed position and by the end of that period, you going to knocked off a portion of your principle. So you got to think you going to be in a better position as well.

Scott Le Quesne: If you are looking at your portfolio saying “Okay. I’ve got a million dollars, if I look at a fixed principle and interest investment loan oppose to my interest only variable loan, there could be 80 to 100 points between the difference. So it’s well worth doing the maths so what’s best for me.

Paul Glossop: Absolutely and I think that’s the key right now is, I think for any investor out there who’s sort of sitting in a position where they’ve got some loans which aren’t fixed. So you can actually look at what the options are out there with them. And then from that point saying well let’s model the different options PNI versus interest only. Looking at potentially lowering some of the LVR position over the next five years and figure out how that is fit into your overall arch and objectives and cash flows.

But as always contact us if you do want to understand that in a little bit more details. Well Scott and his team always I’m assuming happy to take a phone call to discuss your position and how they might be able to help or at least just give you some general advice. You can contact them the details are at bottom of the screen as well as ours and we will catch up with you soon. Cheers!