Investors often prefer to pay interest-only on their home loans because it helps their cash flow. Low repayments allow them to spend more of their money on other properties, meaning such loans can be beneficial in portfolio building. However, the end of an interest-only period can bring with it a significant increase in monthly repayments. You’ll start repaying the loan’s principal, as well as its interest, which could put a strain on your cash flow and prevent you from further investing. You don’t have to allow the interest-only period to end. In fact, most lenders allow you to extend it.
Before you jump in, you need to ask yourself if an extension is the right choice. After all, every month of an interest-only loan is a month where you don’t repay the principal. This means the interest doesn’t fall, plus, it may lead to you having to pay a large lump sum at the end of the loan period. Extending an interest-only loan works best in the following situations:
Lenders look at serviceability when deciding on whether to grant a loan. This term refers to your ability to repay the loan. Paying interest-only affects your serviceability. For example, let’s assume you have a 30-year loan, and you repay interest-only for 15 years. You won’t have reduced the loan’s principal for those 15 years. As a result, your lender will have to examine your serviceability over the 15 years when you will make P&I repayments. You essentially halved your home loan period, which will make the lender warier of you as a borrower. How much can I save by refinancing?Use UNO's calculator to estimate your savings. Calculate Savings ### How Long Can I Extend an Interest-Only Loan for? It depends on the lender and your situation. The major banks tend to limit you to five years because they want you to start repaying the loan’s principal. However, it’s possible to extend your interest-only payments to 15 years. You’ll need to use a specialty lender for this. Some even offer extra features with extended interest-only loans. For example, you may be able to make extra repayments whenever you want. You’ll also usually be able to end the interest-only period whenever you want. This strategy does come with some disadvantages, so it’s important to get help from an expert to fully understand what’s involved before making any decisions.
Again, you have to consider your lender’s policies. Some will happily extend your interest-only period over the phone, or ask you to fill out a simple form. Others will reassess the entire home loan. Remember that extensions make lenders nervous. Your request may be seen as a sign that you can’t afford the repayments. As a result, most lenders reassess your situation if you ask for an above 5-year extension. In this situation, you will probably have to submit another home loan application. That means pulling all the documentation together and going through the process again. You may also get the option of extending your overall loan period. For example, if you want to pay interest-only on a 30-year loan for 10 years, some lenders will allow you to extend the later P&I repayment period to 30 years. This would mean that your loan takes 40 years to repay. You can opt out of this loan extension if you feel you’re financially stable enough to make the P&I repayments in a shorter timeframe.
Your lender will usually want to reassess your loan in the following circumstances:
It’s possible, but a lot of lenders shy away from such extensions. It comes down to the National consumer credit Protection (NCCP) Act 2009. This places an obligation on lenders to dig into the details of their borrowers when they ask for unusual products. As a result, a lender may refuse a residential loan extension because they feel it will reduce your ability to repay the loan’s principal.
There are several other things to keep in mind if you want to extend your interest-only period:
You have to think carefully before extending an interest-only home loan. Remember that your loan’s principal won’t decrease if you only pay interest. This could result in a nasty surprise waiting for you at the end of your loan’s term. Do the following before you request an extension:
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