WHAT HAPPENS WHEN YOUR INTEREST ONLY TERM EXPIRES?
When we are in an increasing interest rate environment that we see ourselves in today, having the double whammy of coming off a low interest rate PLUS coming to the end of your interest only term can be quite daunting!?
For example: if you have a loan of $500,000 on an interest rate of 2.99% and you are now having to refix at 6.50%, your interest payments will more than double from $1,245 per month to $2,700 per month!?
And that's just the interest cost.
When your loan switches to principal and interest and assuming you have 28 years left on the loan term, your repayments will now be a whopping $3,236 per month! ??
So as your interest-only term approaches its expiration date, it's essential to explore the available options to ensure a smooth transition.
Let's dive into the various strategies you can consider when your interest-only mortgage is coming to an end.?
??Option 1: Request an Interest-Only Extension from Your Existing Lender ???
One option is to reach out to your current lender and inquire about the possibility of extending your interest-only mortgage term.
By extending the term, you can gain more time to pay off your loan while maintaining the lower monthly mortgage payments associated with an interest-only loan.
However, keep in mind that your lender will evaluate your current financial situation to assess your ability to repay the mortgage over an extended period. It's important to note that bank policies have become more conservative, so there is no guarantee that your request for an interest-only loan extension will be approved.
It pays to talk to a Mortgage Adviser in this situation as I have all the current information that will increase your chances of obtaining an extension from your current lender.?
??Option 2: Refinance Your Mortgage to Another Interest-Only Loan???
If your current lender is unwilling to extend your interest-only term, another option is to refinance your mortgage to a different lender.
Refinancing to another interest-only loan allows you to continue making interest-only repayments for another predetermined period, typically around two-five years. This option can help you keep your costs low and maintain favourable cash flow on your investment property.
It's important to note that each bank has its own policies and criteria for approving interest-only loans.
Just because your current lender didn't approve an extension doesn't mean another bank won't.
Working with a qualified Mortgage Adviser can help you navigate the various options and find the right lender for your specific situation and needs.
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??Option 3: Transition to a Principal and Interest Loan???
If an extension or refinancing to another interest-only loan is not feasible, you will likely be transitioned to a principal and interest loan when your interest-only term ends. This means that you will start repaying both the principal and interest portions of your loan.
While this option may result in higher monthly mortgage payments, it can be a viable solution if you have adequate cash flow to cover the increased repayments. It's important to assess your financial situation and ensure that transitioning to a principal and interest loan aligns with your long-term financial goals.
As your interest-only term comes to an end, be proactive and explore your options.? Whether it's requesting an interest only extension, refinancing, transitioning to a principal and interest loan, or reviewing your property portfolio, each option has its own considerations and implications.?
Having an experienced Mortgage Adviser on your side can provide you with valuable guidance and expertise throughout the process, ensuring that you make informed decisions that align with your financial goals.?
Remember, being prepared and seeking professional advice is key to navigating the expiration of your interest-only term successfully. Don't get caught out and leave it to the last minute. ?
If you would like some advice around your particular situation then please don't hesitate to get in touch with me.
- Raj ??
?? 022 368 3240
The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Raj Mehta or KHL Finance shall not be liable or responsible for any information, omissions, or errors present. I recommend seeking professional legal and/or mortgage advice for your own personal situation. My Disclosure Statement is available on my website.