If your investment only term is coming to an end, it’s important to plan ahead. Learn more about your options so you can make an informed decision.
Residential property investors often choose to lock their loan into an interest-only period. As a landlord, an interest-only investment loan can be a good way to reduce your costs and optimise your cash flow while maintaining capital growth for longer term benefits. But like all good things, at some point (usually after three to five years) your interest-only term will come to an end.
If the end of your interest only term is looming, it’s a good idea to think about your next steps sooner rather than later. Chances are, you’ll need time to talk to your broker or accountant, dig out supporting documentation and/or spend time shopping around and comparing different investment loans
There are three main options to choose from:
Option 1: Get an extension on your interest-only term
It may be possible to get an extension on your current interest-only loan for another five year term. If you decide to go down this route, you’ll need to think about whether you can cover the remaining principal and interest payments over the rest of your loan term, especially as your principal repayments will increase the longer you delay them.
Option 2: Start repaying principal and interest
Switching to a principal and interest loan may be an option, depending on your income and circumstances. There are a few things to be aware of if you’re thinking about switching to principal and interest:
- Your repayments may be higher than you think. If you’re coming out of a five year interest-only term, you’ll have less time to repay your principal amount than you did at the start of your loan. This means that if you initially had a 30-year loan, once the five year interest only period is over, you’ll be left with 25 years to repay the principal, plus any interest.
- You may be able to get a lower interest rate. When you switch to principal and interest, you may be able to access a better interest rate. Many lenders will reduce the interest rate for borrowers who are on interest and principal payments.
- Your tax deductions are likely to change. It’s a good idea to get advice from an accountant or other professional before making the switch to principal and interest as it’s likely to impact your tax deductions.
Option 3: Refinance and change lenders
Refinancing may be a good option if your current circumstances mean that paying principal and interest is not going to work and/or your current lender won’t allow you to extend your interest only term. When you consider looking around for a new lender, it may help to think about the following:
- Refinancing costs. You may need to pay charges when you refinance your investment loan to a new lender, depending on how your current loan is set up.
- You’ll pay interest for longer. When you refinance your loan, you’re adding more time to your loan term, which will mean paying more interest. For example, if you refinance a 30-year loan term after your five year interest only term has expired, you’re adding another five years to your loan term. This means you’ll be paying interest on the principal amount over 35 years instead of 30 years.
- Potential interest rate reductions. Many investors choose to refinance to get a lower interest rate than they one they currently have. Even a relatively small interest rate reduction can make a big difference to the overall amount you will pay so it may be worth investigating to see if you can get a better deal elsewhere.