Q: My mortgage is currently an interest only loan. I have been advised by my bank that my loan will be moving to principle and interest. What options do I have?
A: In March 2017, the Australian Prudential Regulation Authority (APRA) notified all banks to tighten their lending practices, particularly on interest only and investor residential property loans.
Lending institutions have been compelled to reduce the number of interest only loans on their residential lending book. The trigger for this will continue to be the maturity of existing interest only loans. In 2020, it is estimated that 730,000 interest only loans will mature and convert to principle and interest repayments.
It has become more difficult to find an available interest only loans as fewer institutions offer the option. Interest only loans have become more expensive (i.e. interest rates have increased) as there is less availability or competition available in the market.
For borrowers who have an existing interest only loan in place, you will need to consider your personal circumstances such as family income, personal cash flow, what other investments and debts you now have, and your appetite for risk.
If you currently have an interest only loan and cannot afford to service the same loan on a principle and interest basis, you need to be considering your options now. Options include, refinancing your loan with another institution who will offer terms on an interest only basis. If you cannot negotiate better terms with your current lender, shop around for a more competitive principle and interest loan.
If you are unable to refinance your loan with another provider, you may have to accept the terms of your current mortgage contract. The repayment rate will most likely be at standard variable rates which may be substantially higher than comparison rates available in the market.
If you are unable to service the loan at this rate, you may be compelled to sell assets to clear your debts.
If you can afford to revert your loan to principle and interest, you still need to be addressing this issue now. Lending institutions may offer preferential rates for new principle and interest loans, especially for owner occupiers. Shop around on the basis of loan features and loan costs but please be mindful of the rapidly changing availability of loan finance and potential future headwinds.
Do not leave this until the last moment. Give yourself time to consider a range of options, whilst those options are still available to you.