Data released by comparison site Finder showed that 730,000 homes will convert from interest-only loans to principal and interest loans in 2020.
Graham Cooke, insights manager at Finder, said that borrowers on interest-only loans need to financially prepare for their interest-only period to expire.
“Borrowers can be hit hard once their mortgage converts to principal and interest, as their repayments can increase significantly. If you know your interest-only loan is expiring this year, it’s important to factor this into your budget,” Mr Cooke said.
On the average loan of $395,000, interest-only borrowers should brace themselves for a $3,600 increase in expenses if they are forced onto a standard variable rate loan with an interest rate of 4.8 per cent.
Mr Cooke said that interest-only borrowers don’t need to stick with the same lender once their loan converts.
“If your interest-only loan is due to expire in the coming months, start comparing your options now. There are hundreds of principal and interest loan products to choose from.”
“Banks will sometimes offer a discounted variable rate on a case-by-case basis in a bid to keep your business. It’s therefore worth negotiating with your lender for the biggest rate discount you can get,” Mr Cooke continued.
The comparison site advises the following risks and benefits for interest-only loans:
Benefit: lower repayments. IO repayments are cheaper at first, which can help if you’re struggling to make ends meet. But this won’t last forever, so be prepared for your payments to increase.
Benefit: high-growth investment. IO loans are popular with property investors. You can buy a property, make low interest repayments, watch the property increase in value, then sell at a profit.
Risk: no equity. If your property doesn’t increase in value, you won’t get much benefit on an interest-only loan. You may even end up with negative equity.
Risk: reverting. Once the interest-only period expires, your payments will increase once they revert to principal and interest. This can take a big toll on the household budget.
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