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Property Development WA

The End Of Your Interest-Only Mortgage Period: What You Need To Know To Protect Your Investment

With a record number of interest-only loans set to expire by 2020, it’s vital that you know how to prepare for this if you’re going to protect your property investment.

Interest-only loans have become exceedingly popular in the investment property development world for a number of reasons. In addition to lower monthly repayments freeing up additional cash flow, the tax-deductible nature of interest payments on investment properties also allows investors to claim the maximum tax deduction possible.

That being said, interest-only loans are somewhat of a double-edged sword. The interest-only period doesn’t last forever (it’s typically limited to 5 years), and during this time you’re not building up any equity. With a record number of interest-only loans set to expire by 2020, it’s vital that you know how to prepare for this if you’re going to protect your property investment.

In fact, Moody’s Investors Service has forecast an increase in Australian mortgage delinquencies over the next two years as a result of the “payment shock” caused by higher repayments required when these loans roll over to principal and interest. If your interest-only period is going to expire in the near future, you need to have a plan in place to handle the change.
 

Think Ahead


Despite the huge implications, it can be easy to forget this important deadline when you’re dealing with all of the other pressures of a busy modern lifestyle. Setting a reminder at least three months before the date will give you an adequate amount of time to review your options and formulate a good plan.
 

Shop Around


It’s always a good idea to re-evaluate your loan and see if you’re getting the best deal possible. Shop around different lenders or use a mortgage broker to determine whether your loan still fits your needs and whether you’ve got the most competitive rate.

If you’re able to renegotiate a lower interest rate on your loan, this can help offset some of the payment shock by reducing your monthly repayments. Refinancing with another lender and moving to a new 30-year loan term can also reduce your monthly commitment (but be aware that this will slow down the repayment of your loan).
 

Make a Financial Plan


Everyone’s financial situation will be different depending on your own income to debt ratio. Work out how much your new monthly repayments are going to be and plan for where this money is going to come from within your budget.

It can be a good idea to prepare for the switch by gradually increasing your repayments. For example, if your repayments will increase by $1200 a year, you can increase your repayments by $100 a month for the 12 months beforehand. This will help cushion the blow and allow you to adjust more easily.
 

Look at Extending Your Interest Only Period


If you’ve reviewed your finances and it appears that you’ll really struggle to meet the principal & interest repayments, talk with your lender and discuss possibility of extending your interest only period. It’s not guaranteed, but it might be able to buy you some time to get yourself into a position where you’re able to meet the demands of principle and interest repayments in the future.

Looking to build and investment property that’s going to be financially viable in the long run? As one of Perth’s leading property development builders, we’re able to offer a holistic approach that will consider every aspect of the process, including the long-term financial ramifications. Our finance partners at The Loan Company can also help you secure the type of loan you need to help ensure that your property investment is a success. Get in touch with us today to find out more.

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