All borrowers have the ability to have an interest only loan… but do you know when yours expires? So how far in advance do you need to think, just to stay ahead?
How soon should you plan for the end?
It’s never to early to be prepared! You can start planning as early as the start of the interest free period. It’s all about knowing the exact date your interest only period is going to expire. You should also know what your remaining loan term will be after the expiry. Then you can find out what the repayments will revert back to. Once you know what you’ll be expected to pay you can make some decisions.
You now have the ability to decided if you’re happy for your loan to go back to principle repayments or if you want to extend the interest only period.
How does and interest only loan usually begin?
It all starts at the very beginning of your loan journey. When you first get your loan it’s probably a term of 30-years. From there you might be able to apply for a 5-year interest only period. This means you’re making interest only repayments for the first 5-years, then your loan will revert to principle interest repayments. So instead of paying off your loan in 30-years. It’ll be paid off in 25-years, so your repayments will be higher for those years.
What if you apply for an extension?
If you’ve done your planning and you want to extend at the end of the 5-years you just might be able to! Getting an extension basically means you have to go through the same process that you went through when you applied for the initial loan. You’ll need update pay slips, assets, liabilities and living expenses so the lender can see if you can afford the loan in the future. There are of course pros and cons to the strategy…
Pros – More cash flow when you’re making minimum loan repayments, which can be a great tax strategy.
Cons – Lending is tightening so your loan will become less and less affordable. Interest only loans attract a higher interest rate, so your interest will be higher over your life time, essentially delaying the problem.
If you’re continuously extending or plan to extend your interest only period make sure you have a strategy and a plan so you’re getting the most from your loan.
Whatever you plan to do make sure you’re speaking to your mortgage broker. They have a wide range of lenders who can offer you more choices. Finding the right lender is crucial to the health of your loan in the future.
Staying on top of your payments is SUPER important! Missing payments can negatively affect your credit score and damage your chances of getting a loan in the future.
If your interest only loan is expiring and you want more advice contact the team at Rise High here or leave your details below to make a start of your positive property investment journey! You can also consider additional options such as refinancing or consolidating existing debts to make the most out of your hard-earned money!