It’s the end of the road for 900,000 borrowers on Interest-Only loans, as they’ll automatically switch to Principal and Interest loans this year. If you have one of these loans, now’s the time to find out what your options are.
At the height of the property boom back in 2014-15, around 900,000 Interest-Only loans were taken out, according to an article published recently by the Australian Financial Review.
Many of these loans are fast approaching the end of their 5 year Interest Only period and are likely to jump to Principal and Interest repayments soon.
With a loan of $316,000, the change to Principal and Interest repayments could add an extra $400 a month to your monthly outgoings – that’s almost $5,000 a year.
You might have noticed this isn’t the first time we’ve talked about Interest Only vs Principal and Interest repayments (and it won’t be the last!)
Because we think it’s important to understand the future implications of financial decisions you make today.
If you have one of those 900,000 ‘soon-to-expire-Interest-Only-repayment’ loans, what are your options?
The first thing is to check when your Interest Only term is set to expire.
When it expires, you’ll need to start paying a higher loan repayment. So you might want to work out what the new repayment amount is likely to be (so you can determine whether you can manage it).
If your Interest Only loan term is set to expire soon, you have four options.
1. Let the Interest Only term expire.
If you do nothing, once the loan expires your lender will start debiting higher Principal and Interest repayments from your preferred account.
2. Extend the Interest Only term with your current lender.
To do this, in most cases you need to fully re-qualify for the loan you already have.
This is not as easy as it once was due to the fact lenders have significantly tightened their servicing requirements (especially for investors with multiple properties and multiple loans). But if it’s something you wish to explore, we can help.
3. Negotiate the rate.
It never hurts to ask your lender for a lower interest rate (or for a bigger package discount if you already have a lifelong discount across all your loans).
If you can reduce the rate a little, it will help to reduce the cash flow impact of moving from Interest Only to Principal and Interest loan repayments.
4. Refinance to another lender.
It never hurts to see what other lending options might be available. Perhaps you will secure a better rate. Perhaps you can better manage the cash flow impact by resetting the loan term. Perhaps you want to take advantage of a competitive fixed rate.
Just make sure you look at your overall lending position (not just the loan about to expire), as there may be opportunities to save interest on your other loans as well.
Final word
The sooner you come up with a plan to manage the cash-flow impact of your Interest Only loan terms expiring, the better.
We’ve all heard the stories where investors felt they had no choice but to sell properties because they couldn’t meet the higher loan repayments once they reverted over to Principal and Interest. Whilst there’s generally a few contributing factors that lead someone to this point, often it’s combination of: investment properties not performing as well as expected; increased investment interest rates; and tighter servicing requirements. For example, some lenders are accepting a lower portion of super pension/ rental income than previously, as well increasing the ‘buffers’ used in their servicing calculations.
For detailed analysis of the cash flow impact of Interest Only vs Principal and Interest repayments, see our Case Study here.
