If your interest only (IO) loan period is up, perhaps you’re wondering whether you should try to extend it, or switch to a principal and interest (P & I) loan.
It’s a tricky decision particularly when you consider the fact that banks are now tightening their lending conditions, especially for investors. This crackdown is making it infinitely harder to extend an IO period, or refinance.
With an IO loan, your repayments only cover the interest on what you’ve borrowed. It does not reduce the principal amount. When the interest only period ends, you’re faced with two choices:
- Try to extend the IO period or,
- Completely refinance to a P & I loan
In the current climate, either of these options is tricky.
Which option should I take?
If the home you purchased is your permanent residence, then trying to extend your IO period may not be in your best interests. IO loans provide short-term benefits – such as smaller repayments – but could end up costing you more interest in the long run.
But if your home is an investment property, an IO loan may work out to be the better choice, particularly when you consider the interest is usually tax deductible.
Note: you should discuss this scenario with your tax advisor/accountant. And don’t forget the principal needs to repaid at some point too.
Securing an IO extension or switching over to a P & I loan can be complex. It’s vital to understand the nuances between the banks to ensure you’re getting the best deal, not the bank.
If you have an IO loan and are thinking of refinancing or extending your IO period, please get in touch. With many years of mortgage brokerage experience behind us, we’d love to help demystify the process.