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Are you ready to pay more when your interest-only period ends?

By ,| 3 min read

Buying a house is one of the biggest investments people make and a 25 year mortgage is a long commitment but a surprising number of Australian homeowners don’t really understand the ins and outs of how their home loans work, particularly when it comes to interest-only terms.

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Can you afford to pay $7,000 more each year?

Around $480 billion in interest-only loans are set to expire in the next four years and the RBA estimates a borrower with an interest-only loan of $400,000 will face an increase in repayments of $7,000 per year when their loan switches to principal and interest.

What Australians don't know about their home loans

Naturally, there has been a lot of industry talk about how households will manage their mortgage repayments once their loans switch to principal and interest but we wanted to know what households thought. We wanted to delve into the topic and find out just how much Australians actually knew about interest-only terms so we surveyed 2,500 homeowners.

The results showed that:

  • 30% of homeowners did not know that interest-only loans attract a higher interest rate than principal and interest loans
  • 39% of homeowners did not know when their interest-only period expires or what their P&I repayments would be
  • 30% of homeowners did not know that by using an interest-only period, they would pay more interest over the life of the loan

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Can you avoid this increase?

You can certainly get on the front foot. Switching your repayments to P&I early, before your interest-only period expires, will mean that you'll pay less interest over the life of your loan. Plus, P&I rates are low right now.

This is also a lost opportunity for borrowers according to Lendi co-founder and managing director, David Hyman; “Lenders are offering very competitive rates on principal and interest loans, sometimes up to a whole percent lower than their interest-only rates, so there are significant long-term savings to be made if you can afford to switch to principal and interest.

"The research highlights the need for homeowners to do more research and get more guidance so they can better understand their options when choosing a mortgage. Otherwise, they might end up paying much more than they need to over the life of their loan."

"We know cash flow is the most common reason people choose interest-only over principal and interest repayments so being across basic details such as when your interest-only period expires and what your repayments will be are critical for forward planning and managing expenses, particularly unexpected expenses."

Read our ultimate guide to refinancing your home loan.

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Can you save by switching to P&I early?

Generally yes, the sooner you switch to P&I the less interest you'll pay over the life of your loan.

The longer you leave your repayments on interest-only, the higher your repayments will be when you do eventually switch and this could add significant strain to those already experiencing cash flow issues.

Hyman continues; “Homeowners need to manage their loans proactively rather than taking a set and forget approach.

Check in with a Home Loan Specialist to make sure you understand your home loan terms and find out how you could save on your home loan.

*Online survey of 2,500 Australian property owners, conducted June 2018.

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Important legal stuff
Lendi is the trading name of Lendi Pty Ltd (ACN 611 161 856), a related body corporate of Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence 442372). We will never sell your email address to any third party or send you nasty spam, promise.
# Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
Lendi is a privately owned and operated Australian business. Our mission is to change the way Australians get home loans by providing a faster, smarter and more secure home loan experience designed around the customer’s convenience and needs. Although Lendi compares over 1600 products (2,500+ products including feature and pricing variations) from more than 25 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. Lendi Group Pty Ltd, which is the ultimate holding company of the Aussie and Lendi businesses is owned by numerous shareholders including; banks such as CBA, 1835i (ANZ’s external venture capital partner) and Macquarie Bank, the Lendi founders and employees, and a number of Australian institutional investors and sophisticated investors including UniSuper.
*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria. Top rates include lenders who are on our panel and are then defined by the circumstances provided by the borrower.
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