Interest only loans – a trap for the unwary

An interest only home loan where you are only servicing the interest on your mortgage and not repaying debt can be useful at times.  You might want to reduce outgoings for a period or prioritise paying down your personal mortgage while your rental property ticks over on an interest only loan.

However the Reserve Bank has decided Kiwis are carrying too much of this kind of debt.  So it has put pressure on lenders to shift borrowers off these loans.

We’re seeing reduction in terms from 10 years to five years and pressure from banks to switch borrowers to table loans.  This can lead to awkward discussions at refinancing time.

If you have mortgages on different terms with a single bank, you could find yourself forced to convert one or more from interest only.  You’ll be unable to refinance with another bank because of painfully high break costs across your entire portfolio.

If this rings a bell talk to us now.  You will need a strategy to manage the transition from interest only loans that are nearing the end of their term.  Above all make sure you don’t end up in a position where your bank is obliged to take you off interest only and you are obliged to stay with that bank.

Are you looking at refinancing in the next few months?   Make an appointment