Most people switch to principal and interest payments once their interest-only home loan term comes to an end, but there are a few other times when you might think about changing. Here’s a rundown of when and how to make the switch.
Interest-only home loans vs. principal and interest – what’s the difference?
With a principal and interest loan you pay down on the amount you borrowed (the principal) and the interest accrued. With an interest-only home loan you only pay the interest so you’re not reducing the amount you’ve borrowed.
Interest-only home loan terms are usually limited to three or five years. After this you will need to start paying off your principal amount, unless you choose to refinance or extend your interest-only term.
An interest-only home loan can be appealing as it comes with lower repayments. However, at some point you will have to start paying off the principal amount. The longer you wait, the higher these repayments will be.
This means that on a 30-year loan with a five year interest-only period, you’ll have to pay off the principal amount over 25 years rather than 30 so your monthly repayments will be higher. Because you’re not reducing the principal amount over the first five years, you’ll also pay more interest over the life of your loan.
For example, for a $500,000 loan at 2.44% interest, paying principal and interest for the life of the loan means you pay $205,615.22 in interest. With a five year interest-only term at the start, your total interest payable will be $229,401.57. Check out our repayment calculator to see the difference for your loan amount and rate.
Switching from interest-only to principal and interest with a Bluestone home loan
If your interest-only home loan term is due to expire, you have a few options. You can try to negotiate another interest-only term with your existing lender, refinance to a new lender or start paying principal and interest.
You won’t need to do anything if you want to start paying principal and interest. We’ll send you a letter at 1 – 2 months before your interest-only term is due to expire to let you know that it’s ending. Once we’ve moved you to principal and interest payments we’ll send you another letter to let you know the change has been made and advise you of your new monthly repayments.
Switching before your interest-only term has ended
Generally, if you’ve committed to a three or five year interest-only period, your best option is to continue with it as there are fees involved in switching early. If you’re keen to start paying more towards your loan to reduce the principal amount, you can make additional payments without changing your loan type. These payments will go towards reducing your principal amount.
This gives you the advantage of more control over how much you pay each month over the interest-only amount. If you switch to principal and interest you will need to pay a higher minimum repayment than if you stay on interest-only.
You’ll need to let us know in writing if you want to switch to principal and interest before your interest-only time is up. We’ll send you a loan variation agreement to sign, along with a $250 switch fee. Your new loan and repayments will take effect two months after your request.
Switching from principal and interest to interest-only
If you have an investment property and want to switch from principal and interest to interest-only payments you’ll need to be within five years of your initial loan settlement date with a clear repayment history. You’ll also need to let us know why you want to make the change.
An interest-only home loan means you’ll need to pay higher monthly repayments further down the track, so we’ll need to assess your financial situation. This is to check that you’ll be able to make your future repayments without going into financial hardship.
If you want to change to interest-only because you can’t afford your repayments or if you’ve had difficulty making your payments in the past we have financial hardship assistance available to help you reduce your repayments or pause them for a while. You can get in touch with us here to discuss your options.
Once you’ve made a request in writing and it has been approved by our credit team, we’ll send you a loan variation agreement to sign. Your loan change will come into effect two months after you’ve signed the forms and paid the $250 switch fee.
Call our customer support team on 13 25 83 to find out more about switching between an interest-only home loan and principal and interest.