It pays to plan ahead and prepare for when your interest-only loan payments come to an end.
There was a time when interest-only loans were mainly used by property investors but over recent years, some home owners have also taken out interest-only loans.
The appeal of interest-only repayments is that the loan payments are lower than with principal plus interest (P&I) repayments. That’s because you’re not paying off any of the loan balance.
The downside is that lenders only permit interest-only repayments for a set period, usually five years and at some stage crunch time will come when your lender gets in touch to say the interest-only period is about to end. As a result of the past growth in interest-only loans, the Reserve Bank of Australia (RBA) estimates that around two-thirds of these loans could reach the end of the interest-only period by 2020.
If you’re making interest-only payments at present it is important to start planning ahead to know the options available when the end of your interest-only payments draws near.
Lenders are tightening up on interest-only payments
One strategy is to talk to your current lender about extending the interest-only term for another few years. However, these days fewer lenders are offering interest-only loans – and the rate of interest that applies can be higher than for P&I loans.
Bottom line is, there is no guarantee you will be able to continue interest-only repayments with the same lender, and even if you do, you could find yourself paying a higher rate than in the past.
Switch to P&I payments
In most cases, your lender may offer the opportunity to switch to making P&I repayments. But you may need to be prepared to pay more each month in home loan repayments – the RBA has crunched the numbers and found reverting to P&I payments could add an extra 30-40% to your regular loan repayments.
With that sort of money involved, the end of interest-only loan payments is an ideal time to look around for a more competitive home loan – you don’t have to simply accept what your current lender is offering.
Refinancing to a new loan
You may have the option to refinance your interest-only loan with a different lender. Or refinance to a new loan making P&I repayments though with a longer loan term, which can reduce the regular payments. Either way, it is worth looking to see what is available in the market.
Speak with an expert to know your options
The main point is that a range of options are available when you’re coming to the end of interest-only payments. Planning ahead means you won’t have to make a rushed decision and can be sure the course of action you take is the right choice for your circumstances.
If you have an interest-only loan, talk to your Aussie Broker about the steps you can take to plan ahead.
You may also be interested in: Why refinancing was the best decision I made, and How often should I review or refinance my home loan?