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!
IO loans are particularly appealing to investors with their flexibility and features to help maximise negative gearing. But here’s the kicker: 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. 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. 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.
Note to self: Check my contract!
If any of this is ringing alarm bells reach out to your Loan Market broker. They can help you find out if and when you’ll go to P&I, and work out an action plan for managing the transition.