Aaron Fuda - SMSF, Residential & Small Business Mortgage Broker
Borrowers need to be ready for the cash flow effect of moving from interest-only loans to generally higher repayments on principal & interest loans. Omniwealth Finance suggests that borrowers work through its Interest Only Loan Expiry Checklist to ease the cash flow squeeze.
Interest-only options on home and investment loans have a limited life span, typically occurring in the first 1-5 yeas of your loan term. During this period, you will only pay the interest charged on your loan without any principal reductions to your loan.
At the end of the interest-only period, your lender will issue you with a letter notifying you that your next repayment will be principal and interest, which will be much higher than your current repayment. Moving forward, the new repayment will be made up of the interest charged and the principal reduction of your loan; commonly over a 25 year period.
Lenders are currently reluctant to provide or extend interest-only options for home loans, due to government regulation. These same pressures are not being
applied to investment loans and continued recommendations for interest-only repayments are presented by Omniwealth Finance to lenders.
Interest Only Loan Expiry Checklist
Borrowers need to minimise the impact on their cashflow from transitioning loan types. Omniwealth Finance has created a checklist for all borrowers to assist with this transition:
1. Contact your lender or check your internet banking to find out if your loan is on interest-only and, if so, when the interest-only period ends. Set
yourself a reminder three months before this happens to allow adequate time to review your options.
2. Shop around at different lenders or appoint a mortgage broker to do so on your behalf. This should be a complete review to determine whether your loan still fits your needs and whether you have got the most competitive rate. Keep in mind it may have been up to five years since your last review.
3. If you want to pay principal & interest, moving to new lender and obtaining a new 30-year loan term can decrease your monthly commitment but also slow down the repayment of your loan.
4. If you don't want to pay principal & interest, then moving to a new lender may allow you to obtain a new interest-only period if that product fits your needs.
5. It is important to consider the interest rate differential between the principal & interest and interest-only options. The switch to principal & interest with the right negotiating on interest rate, can sometimes be a more cost-effective option for borrowers. Generally the difference in the interest rate is about 0.50%.
As a borrower, it is always important to remember that you are in control of your mortgage and you don't have to stay with your current lender. So, if you receive a letter telling you that you 'must' switch to principal & interest, review the checklist and weigh up your options.