How to avoid a ‘debt disaster’ at the end of an interest-only loan
With a bulk of interest-only loans set to run out, a Perth-based mortgage broker has offered his advice on how borrowers can get ready for transitioning their loans over.
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Steve Vicary, director of White Knight Finance, has fielded questions from investors who have five-year interest-only loans set to expire soon.
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“At the height of the property boom, thousands of WA mum-and-dad investors took out five-year interest only loans,” Mr Vicary said.
“As a result of the clampdown on interest-only loans that was introduced to slow down the property bubble on the east coast, WA mum-and-dad investors are now finding it harder to get these loans extended.
“Most will have no option but to go onto a standard loan, paying principal and interest. On a loan of $400,000 at 4 per cent interest, that equates to almost $800 a month extra in repayments every month.”
While investors may be caught unawares by the increase, it can be possible to get a new interest loan, Mr Vicary said, but those who are unable to get an extension would be applying for a new loan, and this means a new layer of scrutiny from lenders on investors’ finances.
In order to avoid a “debt disaster”, Mr Vicary suggested his three-month-long good behaviour rule before the end of the interest-only loan.
“Three months of being disciplined about your spending can give you a huge leg-up in being able to refinance your loan and avoid being hit with a financial burden,” said Mr Vicary.
“But bear in mind that some lenders will even look back to six to 12 months. Don’t wait until the last minutes, do your homework and get professional advice as soon as possible.”
In order to be disciplined about your spending, Mr Vicary provided the following tips: