What happens at the end of your interest only period?

Believe it or not, the banks still offer interest only loans but only to specific borrowers who have good credit ratings.

This means the borrower only pays the interest portion of the mortgage and no principal repayment is required. Borrowers typically use this for investment properties because it helps with the cash flow and may even be positive cash flow. Interest only borrowing is more widely used by borrowers that are able to claim interest costs as a deductible expense for taxation purposes, especially property investors.

Westpac NZ used to allow interest only loan for 15 years but has since reduced to it 5 years. In fact, most banks generally offer interest only loans for 5 years. Not every borrower qualifies and the bank will determine on a case by case basis. The bank will need to assess the ability of the borrower to make repayments and also assess the risk profile of the borrower before allowing a borrower an interest only period. In some cases, you may get the interest only period extended to 10 years.

But what happens at the end of your interest only period?

Generally, At the end of a term, say five years (sometimes less), a customer’s loan will automatically roll into a principal and interest repayment structure. If the loan was originally for a 30 year term, the payments are recalculated and spread out over the remaining 25 years. If it helps your cash flow, you could consider requesting the bank to extend your loan term so that principal and interest payments are lower.

In extreme cases, the bank can require the entire principal (known as a lump sum or balloon payment) to be repaid. This can cause financial distress for some borrowers as experienced in some countries where some of the banks have required customers on interest only loans to repay a lump sums at the end of their interest-only period. Customers who were able to do so, faced the possibility of mortgagee sales and in the worst case, bankruptcy.

Can you get the interest only period extended?

Perhaps, but it will be determined on a case to case basis by the bank. Almost certainly you will need a valuer to revalue the property to give the bank an updated valuation of the property but also the bank will be particularly interested as to why you want to remain as interest only mortgage instead of the standard principal and interest repayments.

 

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