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With a recent surge in interest-only loans issued to Australian property investors, what happens when the interest-only period ends?
Blogger: Damian Collins, managing director, Momentum Wealth
The latest residential lending statistics from the country’s banking regulator, the Australian Prudential Regulation Authority (APRA), show a strong shift towards interest-only loans by property investors.
According to APRA, the value of interest-only loans grew more than 14 per cent in the year to September 30.
Furthermore, in the September quarter alone, the share of interest-only loans for residential loan approvals reached 42.5 per cent, emphasising the sheer popularity of these financial products.
Interest-only loans are a great option for property investors, as they allow them to use their cash to repay non-deductible debt or to spend on other assets.
With interest-only loans, as the name suggests, you only repay the interest component of the loan as well as the associated fees. Because of this, repayments are lower than with an equivalent principal-and-interest loan.
Quite simply, you’re only paying interest, and not any portion of the loan.
However, interest-only loans usually only last for five to 10 years before they revert to a principal-and-interest loan. Subsequently, repayments can increase significantly and catch many investors off guard.
So, what are your options when your lender tells you that your interest-only period is close to expiring?
There are three general options that you can take.
Firstly, you don’t have to do anything and start repaying your loan, if you are in a financial position to do so.
Secondly, you can apply with your lender to have your interest-only period extended. Not all lenders will allow you to do this, however, in a competitive market they will try to keep their customers happy and accommodate your needs.
If they are happy to extend the interest-only period, some lenders will require you to complete a new credit assessment or to switch loans, while others will do it without too much fuss.
A third option is to seek out another lender to refinance your existing loan. As well as securing a new interest-only period, this could also save you money, as you might find a better deal with lower interest rates.
Before taking any action, though, it’s best to speak with your mortgage broker, who can advise you accordingly.