Is your interest only home loan about to expire? Here’s what you need to know.
Back in 2014, the number of interest only (IO) home loans on record reached at an all-time high, with many Australians eager to enter into the property market by any means necessary. However, with more than 900,000 of these IO loans now set to expire by the end of this month, homeowners could find themselves in hot water if they aren’t properly prepared to transition into an principal and interest (P&I) loan come the end of January.
In fact, based on recent interest rates, the switch from IO to P&I could see some homeowners having to pay upwards of $400 per month on top of their regular repayment. With this in mind, it’s important for those who are likely to be affected to be aware of their options and make a plan as to how they are going to handle to switch.
Read on for our recommendations on how to reduce the impact of paying an P&I loan without breaking the budget.
Enquire about extending your IO period
If you’re concerned about how you’re going to be able to afford making the switch to an P&I loan, your first step should be to enquire with your lender about extending your IO period. While this option was much more commonplace in previous years, tighter lending criteria means that fewer IO loans are being approved and it’s important to be aware that the chances of extending your IO period are relatively slim.
Remember, if you do manage to extend your IO period, this is only a temporary fix – and sooner or later you’re going to have to come up with an alternative solution.
Talk to a mortgage broker about refinancing
Next, schedule an appointment with an experienced mortgage broker to discuss your options around refinancing. Given that you would have owned your home for a number of years, you may be eligible to move your home loan across to a new bank with a lower interest rate, thereby saving you money in both the long and short term.
Be mindful of the charges and fees associated with refinancing, and make sure you read all the fine print before making any major decisions.
Consider putting your property up for rent
If the additional costs of switching to an P&I loan are going to leave you seriously strapped for cash, it could be a good idea to consider putting your property up for rent, or even think about renting out a spare room. The extra income could help you keep up with your regular payments and help you get ahead until your finances are stable enough to afford it on your own.
Listing your home on sites like Airbnb can be a great way to make some extra money without making any big commitments, particularly if you live in a highly sought-after location.
Sell early to avoid a ‘fire’ sale
Most importantly, you need to be realistic about your budget, and if you know you’re not going to be able to swing the extra cash you may be better off selling up now. The fact of the matter is that as the P&I loans come into play, more and more people are going to be hit with the realisation that they can no longer afford to live in their property, and are likely to decide to sell.
However, if you want to get the best price for your property, it’s essential that you get in early and beat the rush to avoid a fire sale as homeowners scramble to sell.
While it may sound daunting, the sooner you can get on top of the situation, the better off you will be. For further advice on how best to manage your transition from an IO to an P&I loan, get in touch with the team at Rising Tide Financial Services today.