How long can I get an interest-only loan for?
The phrase “interest-only mortgage” is a bit of a misnomer. It’s not an interest-only mortgage. It’s an interest-only period.
With most major banks, an interest-only period can only be approved for 5 years at a time (max).
But at the end of that period, you can apply to extend it.
Two things can happen at the end of your initial 5-year interest-only period.
- You revert to paying principal and interest on your loan – that’s the default option
- You extend your interest-only period for another period (of up to 5 years).
Using this strategy you could theoretically keep extending the interest-only period for up to 29 years.
But this gets difficult the more you do it. This is because the bank will test your income to see if you can afford to pay off the loan in the time you have left.
Let’s say, Jo and Jill get to the end of your first 5-year interest-only period, then apply for another.
Now, they have a 25-year loan.
So, the bank will test to see if the couple can manage to pay back the loan once the interest-only period ends. That means they must have enough money to pay the loan off over 20 years.
That means they need to have more money to show they can afford a higher repayment.
If they do the same thing 5 years later, they
then need to prove they can pay off the loan in 15 years.
This starts to get tough from an income
perspective. Your interest-only extension might not get approved.
What are the strategies to get around this?
One option is to apply to extend the mortgage term.
You can ask the bank: “Can I extend the mortgage back out to 30 years, so my 5-year period is tested over a longer time frame?”
This will keep your repayments lower.
At this point, it can be helpful to move between banks. So if one bank won’t approve your interest-only extension, perhaps another bank will.
Here at Opes, we’ve seen some investors keep their interest-only loans for 15 years and beyond.