What Happens When My Interest Only Period Ends?
At times it is practical to take out an interest only loan. This means for the interest only period you make repayments based on covering the amount of interest charged by the lender and nothing off the loan principal.
When the interest only period comes to an end you will be required to pay principal and interest repayments that will be based on the remaining term. For example, if you took out a 30 year loan term with an interest only period of 5 years, your remaining repayments will be spread across 25 years. This can be a shock for some borrowers, especially if they haven’t prepared for the time the interest rate only period expires.
The idea behind an interest only loan is that you use the money you would otherwise be paying in principal repayments to pay down another debt or for other purposes. For example, if you have an owner occupied home loan and an investment home loan, you may have selected interest only on the investment loan to allow you to make extra payments on the home loan during that time.
If you choose an interest only home loan, it is important that you are disciplined otherwise you may find yourself with nothing paid off and a bigger repayment ahead. It is a good idea to prepare for the change in repayments once the interest only period expires and start factoring them into your budget well before it occurs. If you have been making extra payments on other debts, then you most likely won’t notice the difference as you will be paying a similar amount across the board. However if you have only been paying the minimum it will take some adjustment.
If your loan is due to move to principal and interest it is a good idea to consult your mortgage broker to help you work out your ongoing strategy. Your lender will let you know ahead of time that your interest only is expiring but not necessarily all of your options. There might be more suitable rates and/or loan types with your current lender that you are unaware of, or it might be an ideal time to explore other alternatives.
If you are feeling concerned about your new principal and interest repayments, talk to your mortgage broker. They may be able to help you with strategies going forward, or help you work with your lender. It is important to keep communication open at all times.
For more information on what to do if your interest only period is expiring, contact us.