If your interest-only home loan period is ending, the loan will usually move to principal-and-interest repayments under the existing contract. The repayment can rise because you start repaying the amount borrowed as well as interest, often over a shorter remaining loan term. An extension or refinance may be possible, but neither is automatic and both generally require lender assessment.
Review the change well before the scheduled end date. The right response depends on your remaining balance, term, rate, income, expenses, other debts, property value, rental cash flow and longer-term plans.
What happens when an interest-only period ends?
During an interest-only period, scheduled repayments cover interest but do not reduce the principal. When that period ends, the contract commonly switches to principal and interest. You then repay the outstanding balance over the remaining term.
This creates two important effects:
- the scheduled repayment usually increases; and
- less time remains to repay the principal than if principal repayments had started at the beginning.
The exact date, rate and repayment method are set by your loan contract and lender notices. Check both rather than assuming the change will occur on a particular industry timetable.
Why can the repayment increase substantially?
The new repayment must cover interest and begin reducing the principal. If a 30-year loan had an initial interest-only period, the balance may then need to amortise over the years that remain rather than a new 30-year term. A rate change at the same time can increase the difference further.
Use the Moneysmart interest-only mortgage calculator to compare estimated repayments before and after the switch. Calculator results are estimates, so confirm the lender’s actual figures and test higher-rate scenarios as well.
How early should you review the loan?
Start early enough to gather documents, obtain the lender’s projected repayment and consider alternatives without rushing. A useful review includes:
- the interest-only end date and remaining contractual term;
- the current balance, rate, fees and fixed-rate expiry, if applicable;
- the lender’s estimated principal-and-interest repayment;
- household income, expenses, liabilities and cash reserves;
- rent, property expenses, vacancies and maintenance for an investment property;
- current property value and loan-to-value ratio;
- break costs, discharge fees, application fees and possible valuation costs; and
- your expected ownership period and reason for retaining the property.
Option 1: move to principal-and-interest repayments
Allowing the scheduled switch may be the simplest option if the higher repayment is affordable and the loan still suits your objectives. Principal repayments reduce the balance and can build equity, although property values can also rise or fall.
Ask the lender for the estimated repayment and whether the rate or product changes at conversion. If your loan permits extra repayments during the interest-only period, gradually increasing repayments beforehand may help you test the future cash-flow effect. Check the loan terms first, particularly for fixed-rate loans.
Option 2: ask the current lender about an extension
You can ask whether another interest-only period is available, but an extension is not an entitlement. Policy differs between lenders and products. The lender may reassess income, expenses, liabilities, repayment history, property value and the reason for the request.
APRA’s residential mortgage guidance expects an authorised deposit-taking institution to assess serviceability when extending an interest-only period. A request based only on being unable to afford principal-and-interest repayments may raise affordability concerns rather than support an extension.
Even when approved, an extension can mean the principal remains unchanged for longer, total interest may rise and the later repayment adjustment may become more pronounced. Compare the full projected cost and exit plan, not just the immediate repayment.
Option 3: refinance to another loan
Refinancing may provide a different rate, term, repayment type or features. It is a new credit application, so approval depends on current lender criteria. The new lender may consider serviceability, credit history, equity, property type, rental income, other debts and recent repayment conduct.
Compare:
- the new rate and comparison rate;
- upfront, ongoing and discharge costs;
- the repayment after any new interest-only period;
- the total interest over the proposed term;
- whether the term is being extended or reset;
- offset, redraw and fixed-rate conditions; and
- the risk that a future refinance may not be available.
A lower initial repayment does not necessarily mean a lower total cost. Resetting the loan to a longer term can reduce the scheduled repayment while increasing interest paid over time.
Option 4: restructure or make a partial reduction
Depending on the lender and your circumstances, you may be able to reduce the balance, split the loan or change product features. Using savings to reduce debt can lower future interest, but it also reduces available liquidity. Investors should retain appropriate buffers for vacancies, repairs, rates, insurance and unexpected expenses.
Do not use funds needed for tax, business working capital or essential household costs without considering the consequences. Seek licensed tax or financial advice where the decision involves investment strategy, deductions or retirement objectives.
Option 5: review whether to retain or sell the property
If the revised repayment is not sustainable and neither an extension nor refinance is suitable, review the broader property plan early. Selling can involve agent fees, legal costs, discharge costs and possible tax consequences, and the sale price is uncertain. Waiting until cash flow is under severe pressure may reduce the time available to make an orderly decision.
For investment-property planning, see the rental-yield and loan cash-flow guide and the investment property finance checklist.
What will a lender assess?
An extension or refinance commonly involves a fresh review rather than a simple administrative change. Factors may include:
- verified income and its stability;
- living expenses and dependants;
- credit limits and other liabilities;
- repayment history and any current arrears;
- rental income and the lender’s accepted rental-income percentage;
- interest-rate buffers used for serviceability;
- property value, location, type and condition;
- the proposed term, repayment type and purpose; and
- the reason for interest-only repayments and the proposed exit strategy.
Property security or strong equity does not replace the need to demonstrate repayment capacity.
Documents to prepare
Depending on your employment and loan structure, preparation may include payslips, tax returns, financial statements, bank statements, current loan statements, lease or rental statements, rates notices, identification and a current assets-and-liabilities position. Self-employed applicants may need business financial information and evidence that matches the lender’s documentation policy.
If the higher repayment may be unaffordable
Contact the lender before missing a repayment. Explain the change in circumstances and ask about the lender’s hardship process. A broker cannot approve a hardship arrangement or guarantee that refinancing will solve an affordability problem.
Moneysmart’s interest-only home loan guidance explains the repayment change and the importance of planning for higher repayments. If you are in financial difficulty, free financial counselling is available through the National Debt Helpline on 1800 007 007.
Interest-only loan ending checklist
- Confirm the contractual end date and remaining loan term.
- Obtain the lender’s estimated new repayment.
- Test the repayment against current cash flow and higher-rate scenarios.
- Review rent, vacancies, property costs and cash reserves.
- Ask the current lender about available product changes and assessment requirements.
- Compare refinance options on total cost, not repayment alone.
- Prepare current income, liability, loan and property documents.
- Consider tax, legal and financial advice where appropriate.
- Contact the lender early if affordability is a concern.
Frequently asked questions
Can I extend my interest-only mortgage term?
You can request an extension, but approval depends on the lender’s current policy and assessment of your circumstances. An extension is not automatic.
How long can a mortgage remain interest-only?
There is no single period that applies to every borrower or lender. The permitted period depends on the contract, product, lender policy, purpose and assessment. Check your loan documents and obtain written confirmation from the lender.
Will the loan automatically become principal and interest?
Many interest-only home loans are structured to switch to principal and interest at the end of the agreed period. Confirm the actual process, rate and repayment in your contract and lender notice.
Can I refinance when the interest-only period ends?
You may apply, but refinancing is a new credit decision. Equity alone does not guarantee approval, and the costs and longer-term interest should be compared carefully.
Is interest-only always better for an investment property?
No. Suitability depends on cash flow, total interest, risk, objectives, loan terms and tax circumstances. GQ Finance does not provide tax advice; consider advice from an appropriately qualified professional.
Discuss the lending options
GQ Finance can help compare lender policy and loan structures for an investment-property loan. We cannot guarantee an extension, refinance or particular repayment outcome. Read more about investment property loans or request a discussion.
