Choosing an Interest Only home loan is a key decision you would have made when taking out your home loan perhaps on an investment property to maximise the tax deduction. However, as your needs change, what might suit you in a home loan might also change. Ultimately you will need to pay back the principal and delaying this means that your repayments won’t change until you start paying down that principal.
When the interest only period is about to expire on your loan it is best to plan by tracking or adjusting your spending now or putting money into savings. That way, you can be better prepared for the higher principal and interest repayments and remain in control. If you have multiple interest only loans I recommend you look at an overall strategy for your loan portfolio.
Interest-only loans are suited to the specific needs of a certain few borrowers (and mainly property investors). Due to this, there are a few situations when it’s beneficial to refinance an interest-only loan, these include:
• Lower interest rates. Realistically, the main reason people refinance an interest-only loan is if interest rates have fallen and you are still paying a higher interest rate. With interest-only loans you pay only the interest, so any drop or rise in rates has a bigger impact than if you were paying the principal portion of your property off too. By refinancing to a lower interest rate loan, you may not only increase the interest-only period but reduce the repayments that you need to make. • The interest-only period has ended. Another reason that you may want to refinance your interestonly loan is if the interest-only period is about to end, which for most loans is up to 5 years. You may not be ready to start paying both the interest and the principal off, so refinancing the loan you can allow you to just pay the interest portion.
• Your property value has increased. If your property’s value has increased, you’ll have more equity and you might want to access it for several reasons. Staying with your existing lender is one option and selling the property is another, but you might also want to consider refinancing to a different lender to take advantage of better rates and features, especially if you plan to renovate or build a new property.
• New features. If you’ve decided to make the switch to a principal and interest loan, you might want to refinance. This may be because your existing loan won’t offer you the features you want if you switch from interest-only repayments, or maybe a combination of the other factors above. If this is the case, make a good comparison of the loans available, as products can change over a short period of time.
• Interest in advance. The ability to do this means you can prepay the interest charges for the next year and claim the tax deduction for them this year, which can be useful for some investors. Contact your accountant to discuss whether this would suit your tax strategy.
Contact Belinda Allsopp from Verge Finance to discuss how your options prior to your interest only period ending.