INTEREST - ONLY TERM EXPIRY
Navigating an
interest-only term expiry is not always straightforward.
Usually, all mortgages
have 30-year terms.
If you elect to initially
repay interest only, your loan term typically consists of a 5-year
interest-only term plus a 25-year principal and interest term.
Contractually, the bank
doesn’t have to offer you another interest-only term – they can insist that you
repay the principal and interest for the remainder of the loan term.
You have two options;
request another interest-only term or agree to repay the principal and
interest.
There are two common
matters you should consider - (1) cash flow and (2) interest rates.
The advantage of repaying
interest only is that you minimise your monthly commitment.
You might want to do that
either because you want to divert cash flow elsewhere such as repaying your
(non-tax-deductible) home loan or so that you can take advantage of an offset
account.
The downside to
interest-only loans is that they attract higher interest rates.
In 2017, the banks began
charging higher interest rates for interest-only loans to dissuade borrowers
from requesting them (at the time the banking regulator was concerned that 40%
of new loans were interest-only).
Interest-only loans
attract a higher interest rate of 0.26% p.a. (on average) compared to principal
and interest investment loans (or a 0.55% p.a. premium for interest-only home
loans) – that is the premium you pay during the interest-only loan term.
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Jason Gwerder
Wednesday, 29 March 2023
