A certain “set and forget” mentality slips in with mortgages. Money leaves your account to nibble on your mortgage. Meanwhile, you get on with other things. But here’s the question — if you have an interest-only mortgage (IO) when does it switch to principal and interest (P&I)? Well, you’re not alone!
This crucial detail gets lost for a lot of us. According to a UBS’ Australian Banking Sector update on 19 September 2018, of people who took out a mortgage over the last year, 18% “don’t know” when their IO loan expires, and 8% thought it was in 15 years, which doesn’t exist in Australia!
Interest Only loans are particularly appealing to investors with their flexibility and features to help maximise negative gearing. But here’s the kicker:
Yep—it’s in your contract. This may raise monthly repayments by up to 40%, adding to the woes of Australia’s already heavily indebted mortgagees. It’s going to be big: 30% of existing mortgages are currently IO.
The RBA estimates that about 1.5 million borrowers over the next few years will compulsory switch from just paying interest to P&I according to the banking sector update.
A survey of investors from the Property Investment Professionals of Australia conducted last year, revealed that 26% of IO borrowers expect to “struggle,” or are “unsure” how they’ll handle the transition.
Should you wish to discuss this in more detail, please contact your local Loan Market Mortgage Broker.