Yahoo Finance 
5 steps to move from your interest-only loan
As banks’ appetite for interest only lending wanes, Aussie borrowers need to know how to navigate the shift to higher repayments.
Interest-only loans typically have only limited life spans and tend to expire between one and five years of the loan term. During this period, borrowers will only pay the interest accruing on the loan but they won’t make any repayments for the principal of the loan.
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It sounds good, but it can’t last, according to self-managed super fund expert and mortgage broker at Omniwealth, Aaron Fuda.
“Borrowers need to be ready for the cash flow effects of moving from interest-only loans to generally higher repayments on principal & interest loans,” he said.
“At the end of the interest-only period, your lender will issue you a letter notifying you that your next repayment will be principal and interest, which will be much higher than your current repayment.
“Moving forward, the new repayment will be made up of the interest charged and the principal reduction of your loan; commonly over a 25 year period.”
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How do I do it?
Mr Fuda said there are five steps borrowers can take to ensure their cash-flow doesn’t take a hit when transitioning out of interest-only repayments
Contact your lender:
“Contact your lender or check your internet banking to find out if your loan is on interest only and, if so, when the interest only period ends,” the broker suggested. “Set yourself a reminder three months before this happens to allow adequate time to review your options.”
2. Shop around:
Mr Fuda said borrowers should compare the different lenders’ rates and decide whether their current loan is still appropriate.
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3. Think about extending your loan:
“If you want to pay principal & interest, moving to a new lender and obtaining a new 30-year loan term can decrease your monthly commitment but also slow down the repayment of your loan.”
4. Or consider jumping ship:
A new lender could help you access a new interest only period, he explained.
5. Measure the financial difference between the different repayment styles:
“It is important to consider the interest rate differential between the principal & interest and interest only options,” Mr Fuda said.
“The switch to principal & interest with the right negotiating on interest rate, can sometimes be a more cost effective option for borrowers. Generally the difference in the interest rate is about 0.50 per cent.”
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While lenders are currently easing off on interest only loans, due to a government crackdown on the loan type, borrowers need to remember they are in control of their mortgage, the broker said.
“You don’t have to stay with your current lender. So, if you receive a letter telling you that you ‘must’ switch to principal & interest, review the checklist and weigh up your options.”
