Principal & Interest Loan Structure

2 Dec 2019

As part of a growing menu of Teal Assist services, Brad Teal Real Estate is pleased to announce its newly formed partnership with BCP Finance, offering our clients access to independent finance solutions.  BCP Finance was founded by Brett Hartwig in 1995.  Brett has over 40 years of banking and finance experience and has grown BCP Finance to be an integrated arranger of Residential, Commercial and Corporate financing solutions.  Keep reading to learn more about the excellent finance insight the team at BCP can offer.

Has your bank asked you to switch from an Interest Only Loan to a Principal and Interest loan structure?

Introduced as a significant loan repayment policy in 2016, Principal & Interest (P&I) loan structures are now more common than ever before. But, what does this mean for landlord borrowers and their assets?

Read more to find out how a P&I loan restructure can affect your investment property and how you can best prepare for the switch.

What is a Principal and Interest loan structure?
Principal & Interest loan structures allocate one portion of your monthly repayments toward the Interest accrued for the time of the loan, and the other portion toward reducing the Principal amount borrowed. P&I loans are structured between 20 and 30-year loan terms, to repay the loan in full by the end of the loan period.

How can the P&I structure impact Landlords?
Three key things can impact the Landlord/borrower when switching to a P&I loan structure:

  1. Monthly payment increases
    The monthly loan repayments will most likely increase due to the allocated reduction on the Principal amount.
  2.  Tax-deductible debt reduced
    When switching to P&I, the tax-deductible debt amount will decrease, as borrowers can only claim such benefits on the Interest Only portion of the loan arrangement, not the Principal.
  3.  Adverse effects on asset cash-flow
    The surplus ‘Cash Flow’ from the property can also be impacted by the banks converting loans to a P&I position. P&I structures have the potential to affect the Negative Gearing ‘tax planning’ structures that have supported Interest Only investments in the past.

Who is responsible for the change in loan structure?
Banks are now pushing borrowers to convert to a P&I structure as a result of industry bodies APRA and ASIC looking to hold a more significant proportion of their loan books under P&I arrangements. 

Who does the change in loan structure affect?
Principal & Interest structures are predominately aimed at maturing Interest Only clients. This is often due to the increased risk associated with the Interest Only structure, whereby the Principal amount isn’t being paid down. Banks also often raise interest rates to encourage borrowers to switch into a P&I loan agreement.

How can I prepare?
Contact the team at BCP Finance today for the expert advice you need to optimise your borrowing capacity specific to your needs.


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