Paying interest only is one of the best ways to manage your cash flow as an investor but is extending your interest only period possible?
When your IO does end, you’ll find your mortgage repayments will increase significantly, potentially preventing you from investing further.
Luckily, there is the option to extend your interest only period when it’s about to expire.
COVID-19 / Coronavirus: Change in interest-only home loans
ANZ joins CBA and Westpac in offering existing customers the option to switch to interest-only repayment, or to extend their interest-only loan term by 12 months without a full serviceability assessment.
This followed after APRA temporarily relaxed its responsible lending guidelines for existing loans.
Customers can now switch to interest-only repayment or extend their IO term by 12 months. To be eligible customers:
- must not be in arrears.
- must not be in financial hardship.
- must be employed and currently receiving income (includes JobKeeper) – any reductions in income must be temporary and in response to COVID-19.
- must have settled their current loan at least six months prior.
- must not be paying LMI.
- must not be requesting additional credit.
- must not be receiving other COVID-19 assistance.
Please note that, the full serviceability assessments will continue to be required for new lending.
Should you extend your interest only period?
You should consider extending if:
- You’re saving to buy more investment properties.
- You’re diverting your money to pay off your car loan and credit card debts.
- You haven’t yet paid off your home loan.
- You’re in financial difficulty and would find it hard to make higher repayments.
You should consider paying principal and interest (P&I) if:
- You’re not planning to buy any more investment properties.
- You’ve already paid off your non-tax deductible debts such as your home loan and credit cards.
- You’re in a strong financial position with excess cashflow.
15 years interest only? Really?
Yes, really! While most banks only allow you to pay interest only for 5 years, there are others that allow interest only home loans for up to 15 years!
- Fix for up to 15 years.
- Switch back to principal and interest at any time.
- Make extra repayments with no limitations.
- Great professional package discounts are available.
If you’d like to find out more about long term interest only periods then call our mortgage brokers on 1300 889 743 or fill in our free assessment form.
Will having interest only loans reduce my borrowing power?
Yes. Interest only repayments will reduce your borrowing power with some lenders. This is because they calculate your serviceability based on the repayments after your interest only payments end.
In other words, on a 30-year loan with a 10-year interest only period they’ll be assessing your ability to pay the loan back over 20 years!
There’s an easy way and a hard way to apply for it
In some cases, your lender can extend your interest only period over the phone, via your mortgage broker or by you filling in a form. They don’t need to reassess your full situation.
However, if you don’t meet certain bank criteria then you’ll need to submit a full application for the bank to assess. That means proving your income and in some cases providing statements for your other debts.
Most banks require a full assessment if you’re asking for an extension for more than 5 years or your loan will have more than 10 years in total with interest only payments.
How to do a quick extension
Firstly, call us on 1300 889 743 and we can let you know if you’re eligible. Yes, you can call us even if you didn’t use us as your mortgage broker and we’ll help you free of charge.
We can then send you a form to sign to extend your interest only period. With some banks, we may just call them or ask you to complete a section in their internet banking.
How to do a full assessment
If you aren’t eligible for a quick extension then you’ll need to do an internal refinance. That means we’ll need your payslips and a couple of other documents and will be submitting a full loan application.
Your loan term will normally be extended back out to 30 years but you can choose not to do this if you’d prefer to keep your original loan term. Your interest only period will also be extended when the assessment is complete.
What if my bank won’t extend my interest only term?
Don’t worry, there are other lenders who can help.
Call us on 1300 889 743 or fill in our free assessment form and we’ll let you know what options are available.
Why might the bank reassess my loan?
- You’re asking for an extension of more than 5 years.
- Your loan will have interest only repayments for more than 10 years in total.
- You’ve been missing payments or have made a payment arrangement with the bank.
- Your home loan is owner occupied (not for investment purposes).
What if my home loan is fixed and interest only?
Many investors combine an interest only period with a fixed interest rate. Since most banks require the term of the interest only period and fixed rate to be the same it’s quite likely that your fixed rate is also expiring.
You can read our page on what to do when your fixed rate expires for more information.
What fees do banks charge to extend?
In most cases, there are no fees for home loans that are under a professional package. However, there are small fees of approximately $300 for basic loans.
How do I switch from interest only to P&I?
Often, you can simply call the bank and ask them to increase the size of the direct debits being made from your bank account.
Technically, your mortgage is still interest only because the minimum payments are just the interest. However, in practice, you’re making repayments as if you were paying off a P&I loan. Doing it this way helps you avoid bank fees for switching loan types.
Are interest only repayments only for investment properties?
It can be difficult to get approved for interest only repayments for a home loan that isn’t for investment purposes.
Why? APRA is concerned about the lending practices of the banks and, under the NCCP Act, it could be argued that interest only repayments aren’t always suitable for “owner occupied” home loans.
If you have a good reason to have interest only repayments then call us on 1300 889 743 or fill in our free online assessment form and we’ll see if you qualify.