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If you have a home loan that is currently on Interest Only payments, and you’re not sure what will happen when that period expires, this is a must read!
There is no doubt that this will catch many people unawares and potentially cause financial hardship.
Until about two years ago it was easy to get an interest only loan, and it would be fair to say that banks’ qualifying criteria were somewhat lax – but that’s no longer the case. So for those who think they will simply “roll” onto another interest only period, you might be in for a nasty surprise.
P&I Payments will be higher than if you were on P&I from the outset
The problem for borrowers with Interest Only loans is that the P&I repayments will be calculated over the REMAINING term of the loan. That means if you had a 5 year Interest Only period, your P&I repayments will be calculated over 25 years (assuming a total loan term of 30 years).
Remember, the idea of P&I repayments is that you completely repay the loan over the “term” or duration of the loan.
Depending on your interest rate and remaining term, your repayments could go up by 20% to 55% when your loan converts to P&I.
What to Do Now? – Be Proactive
The first thing is to check when your Interest Only period expires, and find out what your P&I repayments will be.
If you would like some assistance in calculating what your P&I repayments will be, give us a call at Redlands Mortgage Solutions, we’ll work through it with you.
Once you have this information, you should consider whether you will be able to make those higher repayments. But also keep in mind that one day interest rates will go up, so you need to be in a position where, if that happens, you won’t be caught short.
If you are only making the minimum repayments and not building a savings “buffer”, you are treading on thin ice. During the interest only period, and during this low interest rate environment, you should be getting ahead!
I highly recommend that you start making payments (or at least savings) as tho your loans were already on P&I payments, and even a bit more if you can. That way your household budget will already be adjusted for when that time comes, and you won’t experience a financial shock. It will also mean that you will have made a bit of a savings buffer before that time comes.
If you find that you simply can’t stretch your budget to meet these extra repayments, or you are going to find yourself in financial stress or hardship, please give us a call – we may be able to assist with restructuring your loan.
What Are Your Options?
Option 1: Adjust Your Budget
Your first and simplest option is to pay the higher P&I amount and start paying down your loan. You may need to make some lifestyle sacrifices to be able to come up with the extra cash, and/or find some additional income if that’s possible. However if that is going to be difficult for you, read on.
Option 2: Loan Restructure/Consolidation
By restructuring your loan through refinancing, your P&I repayments can be significantly reduced. There are 3 reasons for this.
Firstly, your loan will be re-set over a 30 year period and the repayments to repay your loan over 30 years are significantly less than over (say) 25 years.
Secondly, when you refinance you are very likely to get a lower interest rate than your existing bank will give you. This will help reduce your monthly repayments.
Thirdly, when refinancing your loan it may be possible to also consolidate some smaller debts such as personal/vehicle loans and credit cards. By doing this your overall debt repayments will be reduced because it will all be on a lower rate and spread over 30 years.
Warning: Do not assume that you can refinance. As I mentioned at the beginning of this article, bank’s qualifying criteria has tightened and you may not find it as easy to get a loan now as you did in the first place. But feel free to give us a call and we can have a look at your refinance options.
Option 3: Reduce Your Debt
Assuming you’ve adjusted your household budget as much as you can and are not able to tap into a higher income, the harsh reality is that you may need to sell some assets to reduce your debt.
You may have some assets such as a boat or additional car that you can sell, but that may only buy you some breathing space.
The harsh reality is that if you can’t meet your monthly home loan repayments, you may be forced to sell your investment property or home.
Don’t Be Alarmed
This article is not intended to alarm you. It is intended to bring your attention to what potentially lays ahead, to work through your options, and to act early.
If you have only your home and don’t own investment properties, you should manage OK with some adjustments to your monthly budget,.
If, since you got your home loan, you have accumulated other debts and credit cards, then the best option might be to look at debt consolidation.
However if you have one or more investment properties which are all on Interest Only periods, then you may need to make some difficult decisions about your overall debt and investments.
We’re Here to Help
If you’d like some help to firstly calculate what your future repayments will be, and secondly to look at the options available to you, give us a call at Redlands Mortgage Solutions to discuss your circumstances.
I promise you, we’re not pushy, we only make recommendations that will benefit you, and we’re happy to just talk and make suggestions.
Redlands Mortgage Solutions – Get a Professional on Your Side
Yes, we are based in the Redlands and service clients from Redland Bay to Victoria Point, Cleveland and Wellington Point, from Capalaba to Stradbroke Island.
However we also have clients from the Gold Coast to North and South Brisbane, and even interstate.
Helmut has a Bachelor of Business and Diploma of Finance and Mortgage Broking, and came from an extensive banking career before establishing this broking business in 2011. Those are a few things that set him apart.
Another is his genuine willingness to help.
His banking experience in providing home loans to investors and business owners, and providing commercial loans for a large range of enterprises, makes Helmut perhaps the most qualified mortgage broker in the Redlands.
And he’s a true local boy, having grown up in the Redlands and attending Victoria Point Primary School and Cleveland High, before leaving for his university studies and kicking off his banking career in London. But as they say, home is where the heart is, and Helmut is delighted to bring his experience and expertise home to assist the happy people of Redland City.
So if you're looking for someone who has a good understanding of banking, the tenacity to get the best deal for you, and the heart to help, please give us a call!
Feel free to contact Helmut directly to see how we may be of assistance :
07 3488 0827