According to a recent Finder analysis of Australian Prudential Regulation Authority data, 730,000 interest-only (IO) home loans will convert to principal and interest (P&I) this year.
As a result, many Australians are going to be hit with higher repayments and potentially be in a position where they can no longer continue to service their loan.
Given the current state of affairs, it is paramount borrowers stay aware and ensure their budget allows for when their loan converts from IO to P&I, which is usually between three and five years after being granted an IO home loan.
While it makes sense for investors to pursue an IO loan for the initial cost benefits, The Loan Company General Manager Simon Kahl believes owner-occupiers should always seek out P&I.
“If you’re in a position to do P&I, then you probably should,” he said.
“It’s good, smart practice, as well as being financially responsible, to have your owner-occupier loans as a P&I product to pay down your asset.”
Mr Kahl said investors needed to be careful, as once the initial five-year IO period was over, the remainder of the P&I loan would be assessed on a 25-year term rather than 30-year, resulting in larger repayments and a significantly higher overall outlay.
As borrowers are no longer able to be locked into any specific lender before their loan ticks over to P&I, Mr Kahl recommended they began to consider their options at least three months before the deadline.
“If that time is coming up – and usually banks send out notifications – get a plan in place on how to maximise the potential value of your property,” he said.
The Finder analysis stated in the 2015-16 financial year, 39 per cent of loans granted were interest-only – a value of about $295 billion.
Mr Kahl said many customers, particularly of traditional banks, might be unaware of the numerous lending options available to them.
“If they approach their bank directly they’re not getting access to every home loan option available,” he said.
“Banks only have one suite of options and for the consumer unfortunately this means what they don’t know, they don’t know.”
Mr Kahl said the key difference was seeing a broker and being provided a comprehensive analysis of each borrower’s individual circumstances, and developing a strategic plan on how to approach them.
“We’re in a position to offer up to 30 different lenders, with a diversified range of alternative loan options a customer will never have access to from their bank.”
The Best Interests Duty bill, scheduled for release on July 1, will mandate legally that mortgage brokers must always act in the best interests of their clients. The law makes official something Mr Kahl said brokers had always done.
“Speaking with a mortgage broker is the best thing someone can do at the end of their IO term,” he said.