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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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.
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:
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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."
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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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