For many borrowers the idea of an interest only loan seems to be ideal as the initial repayments on the loan are significantly lower, giving borrowers up to 5 years to commence principle payments on their loan. What borrowers don’t realise is that the principle payments after the interest only period will be larger than if the loan has only 25 years to run and the total debt must be paid in full over a shorter term.
According to a survey conducted by UBS housing and banking, one in five interest-only loan borrowers will struggle to make loan repayments at the end of the interest only period. This discovery comes as about 30 percent of outstanding loans will convert to principle and interest in the next two years, increasing monthly repayments for over a million borrowers.
Additionally, some borrowers were unfamiliar with the fact they had taken out an interest only loan or unaware of what the terms of IO loans entail.
This has experts calling for borrowers that are unsure of their loan to check the repayment type, and for interest only borrowers to prepare for the upcoming spike in their repayments. Owner-occupiers or investors who borrowed above the average of $395,000 should expect to see an increase by $789 per month, $9,468 annually. Borrowers are urged to start planning now to cut their spending.
Graham Cooke, insights manager at Finder, says “If your interest-only loan is due to expire in the coming months, start comparing your options now. There are hundreds of principal and interest loan products to choose from,”. Taken as a case-by-case approach some banks will offer a discounted variable rate and is therefore worth negotiating for a better rate with your lender.
