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Recent reports suggest one third of customers don’t understand their interest only home loan.

The goal shouldn’t be to just have a mortgage, it should be to own one’s home outright while still maintaining one’s lifestyle.

For those who have an interest only home loan that’s going to switch to principal and interest in the near future, let’s look at three reasons to review this strategy now and not wait until the letter arrives saying the monthly mortgage repayment is going to increase by hundreds of dollars. 

Australian lending criteria has tightened

If you took out your home loan a few years ago, there’s a good chance the lending criteria today is more strict than it was when you first got your loan, irrespective of your lender.

Why does this matter?

If your home loan is going to switch from interest only to principal and interest shortly, you’re likely going to need to spend hundreds of dollars more on your monthly repayments.

If you have the spare cash each month to cover those additional repayments and you know what those extra payments will be, then there’s no issue.

However, if you’re not sure how much the additional repayments will be and you’re not sure whether you can afford them, then the last point you want to find out that you’re not in a position to negotiate with you current lender or any other lender is when you have to start paying the additional repayments.

A safer option is to find out what your options are now, so that you can make informed decisions.

Your circumstances may have changed

Think back to when you first took out your home loan. Has anything changed since then?

Have you had another child? Has your income increased or decreased?

Have you gone through a separation or found a new partner?

Have unforeseen events occurred, requiring taking on more credit card debt or personal loan debt?

If any of the above apply to you, it’s likely that your borrowing capacity now is different to what it was when you first took out your home loan, and that can affect your ability to refinance to other lenders or to even make changes with your existing lender.

If you can’t afford to make principal and interest repayments, it’s better to find that out now, not later.

If someone takes out a 30 year mortgage with the first 5 years interest only, they only need to pay the interest on the balance for the first five years and then they need to start paying the interest plus the principal over a 25 year period.

If someone takes out a 30 year mortgage as principal and interest from day 1, they are paying down there debt each month and therefore get to pay off the principal over 30 years, not 25 years.

This means the borrower who chose interest only for their first five years will have to make higher repayments from year 6 onward compared with the borrower who selected principal and interest from day one.

If the interest only period on your home loan is about to come to an end, it’s worth reviewing your financial situation earlier rather than later, so you can explore all your options without being under pressure to make a decision.

Kind regards, 

David Collett

PS Still not convinced? Read more about interest only home loans in Australia here. 

 

Disclaimer

The above is not advice and does not take your personal circumstances into account.

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