Interest-only investment term about to expire?

If you’re currently paying interest-only on your home loan, at some point in the future it will expire and you’ll be required to pay off both principal and interest.

 

Interest-only loans typically only run for a period of 4–5 years depending on your lender, so it’s worth planning in advance what you’ll do when it expires.

 

Here are some of your options.

 

Get an extension

 

It might be possible to get an extension on your interest-only period and continue to pay just interest for another fixed term.

 

This is something that you will need to speak to your lender about and each one will vary in how they might handle this request.

 

They will likely want to see you move to principal and interest at some point, but this will come down to your personal circumstances and your lender.

 

Start repaying principal and interest

 

Depending on your goals and financial situation, moving across to principal and interest might be an option for you.

 

If you’ve owned your property for some period of time, you might now be in a position where you’re earning higher wages or seen your rental income increase.

 

However, there are some things you will need to consider beforehand, including how much time is left on your loan. If you had a five-year interest-only period with the total length of the loan being 30 years, then you’ll have 25 years to pay down the principal which would mean higher repayments than a 30-year loan term.

 

Another important consideration is that with a principal and interest loan, you may be able to get a lower interest rate. Lenders might perceive a principal and interest loan as being lower risk and therefore offer a lower interest rate.

 

Refinance

 

If you want to keep on paying interest-only, or even if you want to switch, it’s worth talking to a mortgage broker and comparing your options.

 

Just because you want to revert to a principal and interest loan doesn’t necessarily mean you’re going to be getting the most competitive interest rate or the right loan features to suit your needs.

 

If your intention is to continue paying interest-only, it’s worth having a mortgage broker assess the market and see what the right solution might be for your situation.

 

The other important considerations if you choose to refinance are if there are any costs involved, as well as thinking about the new loan term you want to take on and the costs that might be associated with that.