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In responding to us, just two banks volunteered information about the extent of their interest-only lending. Regulators in Australia became concerned when interest-only loans hit more than 40% of new lending across the ditch. We are an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions.
Ourloan affordability calculatorandrepayment mortgage calculatoranswer both of these questions in seconds. Unless it’s an investment property or you are intending to sell within a few years, chances are that you will need to pay off the principal of the loan at some point. Interest-only mortgages only extend the time taken to pay off the principle and this increases the repayments in total. Even with the best financial planning, which includes allowing for unexpected events, sometimes things can still take you by surprise. If you have a mortgage and are experiencing financial difficulties, it pays to talk with your lender sooner rather than later.
Interest Only Mortgages Explained
Now let’s say the interest rate on this loan is set at 4%, over a 30-year term. The amount you can temporarily save using an interest-only mortgage depends on the interest rate. But in this case if your mortgage was $600,000, for example, you might put $400,000 on a long-term interest-only period, and the other $200,000 on P+I. That means you’re now tested on your ability to pay back the loan over 25 years. The first time you applied you had a 30-year loan with a 5-year interest-only period. So really, the phrase “interest-only mortgage” is a bit of a misnomer because it’s not an interest-only mortgage, it’s an interest-only period.
Fixed-rate home loansA fixed-rate home loan is, as the name would suggest, a mortgage that has an interest rate that doesn’t change for the life of the mortgage. Income is irregular and the borrower wants the flexibility of making interest only minimum payments during times in which income is low, and makes larger payments during periods in which income is higher. The home may not be worth as much as what is owed on the mortgage or it will depreciate quickly if housing prices fall. Even if the prices remain the same, if the borrower has negative amortization they will owe more on the mortgage than what they could get from selling the home. They may find it difficult to refinance and if deciding to sell, may owe the lender more than what would be received from a buyer. Whether you are a first-time buyer, buying your next home, building or thinking about switching your current mortgage, we can help you compare the options and save.
Compare Home Loan Interest Rates
However, once completed and the total borrowing is finalised, the homeowner will re-mortgage and get a repayment mortgage. Banks don't advertise their interest-only rates, terms and conditions, and ultimately encourage borrowers into repayment mortgages. Most interest-only loans are only available for a few years, with none of the principal being repaid during that time.
But, because you aren’t paying any of the principal the total interest you end up paying will be higher than if you were paying off the principal as well. If you want to extend the interest-only period, talk to your lender. While this will cost you more in interest over time, you might be able to stay on interest-only repayments for a while longer. Don't get caught out when your interest-only period ends. Instead, make sure you know exactly how much you are paying now.
You could get a cash contribution of 1% with a new ANZ Home Loan
Use our interest-only calculator to estimate your monthly IO payments, or use this calculator to compare fixed vs ARM vs IO ARM loan payments side-by-side. Because you still have to repay your loan before your maturity date, your repayment amounts after the interest only period ends will be higher. Interest only loans are only available on a short term basis to ensure you can still pay down the loan before your maturity date. Extend your loan period AND negotiate a repayments holiday.
Negotiate a mortgage repayment holiday - lenders will consider circumstances on a case-by-case basis under their financial hardship framework. An interest-only mortgage gets you on the 'property ladder', and in some situations, an interest-only mortgage can be cheaper than renting. You own your home, and have the option to switch to a repayment mortgage as well as paying down cash amounts that you save.
Reducing (flat) loan
Your repayments are the same every month, even if the lender increases or decreases its home loan interest rate offers. We compare home loans from lenders all over New Zealand to help you find the best mortgage rates. We believe that the best mortgage offers will be the lowest priced, with low fees and provided by a trusted lender.
So paying down personal debt frees up useable equity, whereas paying investment debt may not. In fact, the higher payments mean you may end up paying more for your house overall than you would if you had a shorter interest-only term, or a normal P&I loan. This could lead you to rely on this extra cash-flow for your living expenses without thinking about the fact you’re not actually investing in anything worthwhile. A repayment mortgage means your monthly payments are calculated so that what you pay includes some of the loan amount and the interest, meaning you are repaying the loan over the term. For most Kiwis buying their first home or remortgaging, the longer the deal term is better. However, as most lenders will charge you for early repayment or overpaying your mortgage, it is essential to consider how long you want to be tied in for.
Interest-only mortgages attract higher interest rates because they are higher risk loans. Because the borrower is not paying the mortgage back at first, the lender charges more interest. When your mortgage's interest-only period ends, you start making principal and interest repayments, which means the amount you have to repay your lender increases sharply. Every borrower benefits from a more competitive interest rate because it makes your repayments lower. Of course, it’s not the only factor you need to focus on, but the best interest-only mortgage for you has a rate that’s lower than most. You have trouble renting it out, but you are waiting for the property to grow in value.
An investor can often borrow slightly less than they could if taking out a standard P+I loan. But with a P+I loan you are continuously paying the debt down, which means you pay less interest as the size of your loan starts to decrease. There are two reasons an investor would opt to use an interest-only mortgage as opposed to a principal and interest mortgage. This is because every payment you make on a principal loan decreases the amount left, which in turn means less interest. Do you have a question or comment about the Interest only mortgage calculator? Feel free to leave your thoughts in the comment section at the end of the page.
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