The Interest Only Trap
According to recent data from the government regulator (A.P.R.A.) Australian Prudential Regulator there are approximately 730,000 home loan facilities where the usual maximum (5) year interest only terms are expiring through 2020 and 2021. Unfortunately on expiry of these terms unless the related borrowers refinance or restructure the loans, they will automatically convert to principal and interest payments for the remaining full term of the loan. If that initial loan was taken out in 2015 for a (30) year term , then the residual term is (25) years and that’s what the new loan repayments will be structured to. As an example, a $400,000 loan @ 4.50% saw a borrower paying $1500 per month. Assuming the interest rate remained the same the $400000 over the remaining (25) years would see loan payments going forward jump to $2,224 per month. That’s a dramatic increase!
Now given the above the borrower’s have a number of choices but they need to act
preemptively in sourcing a good loan option before the interest only option expires :-
Look to refinance to another interest only facility with another lender (as this may be tax effective).
Convert to principal and interest but try and negotiate with their existing lender, on interest rate and loan terms.
Look to convert to principal and interest with another lender.
Since 2016 changes made by A.P.R.A. in assessing the banks mortgage book risk, meant that interest rates on investment home loans were priced higher. The majority of these interest only loans under discussion here, are now considered a higher risk. This results in higher loan rates now applying to these facilities as opposed to owner occupied home loans. The overriding focus here is, if you are in this position as a borrower, consider acting at least (2) months prior to the expiry of the loan facility. As you can see there are options for you and
COMPASS lending & finance can certainly assist in helping set a new loan structure that does not impact negatively on your cash flow.
Contact Michael on 02 6583 2211 to discuss this further.