According to Reserve Bank estimates, a record number of interest-only loans are due to expire by the end of 2020. This means around $240 billion of interest-only loans are scheduled to roll over to Principal and Interest (P and I) repayments.
According to Moody’s Investors Service, mortgage delinquencies are expected to increase during this period thanks to the “payment shock” of bigger repayments, which will increase by around 30%.
As lending rules and lender requirements have tightened over the past few years, many borrowers are finding their borrowing capacity has reduced when they look to renew or refinance their loan. This can be particularly problematic for borrowers on interest-only loans whose interest-only period is coming to an end. They might not want to (or can’t afford to) roll over to P and I repayments, but may also not be able to renew their loan with the same terms, nor arrange another interest-only loan given the tighter lending rules.
Without grandstanding too much, this is exactly where Smartline Advisers can help you. They have access to second- and third-tier lenders, and they know which ones may be more amenable to your financial circumstances. Banks outside the majors can often look at lending and risk differently, as well as offering competitive rates that can assist borrowers who don’t fit the standard mould. After all, banks are still in the business of lending money, and need to balance this need within the new lending landscape.
Being proactive about your loan is the best bet. If your interest-only period is ending within the next six to 12 months, consider getting in touch with your Adviser now to discuss your options. Don’t wait until the day your interest-only period expires only to find yourself between a rock (higher P and I repayments) and a hard place (unable to renew on interest-only terms with your current lender). The worst-case scenario could see you having to sell your property at the worst time because you can no longer make your repayments.
Your Smartline Adviser will be able to help you determine if you still meet the criteria with your existing lender and if so, whether you should re-apply now to extend the current interest-only terms. If you no longer meet the requirements for an interest-only loan, your adviser may be able to negotiate a more competitive rate on the P and I repayments, or even a repayment plan or an extension on your loan period. Sometimes, just slightly increasing repayments over a 12-month period can help you adjust to this “new normal”.
Alternatively, your Smartline Adviser may discuss the possibility of a refinance, and help you get an interest-only loan with a different lender. They may even advise you to wait and see, as the lending landscape is constantly changing and could conceivably start to open up a little. Either way, as always, it pays to get professional advice upfront.