Your interest only period is expiring
Now’s a great time to review your loan and determine what’s best for you.
Your options
Principal and Interest
If you’re happy with switching to principal and interest at the end of your interest only period, then you don’t need to do anything as this will happen automatically.
Interest Only
If you’d like to remain on an interest only period, please get in touch to understand if further interest only options are available to you.
We may need to assess your financial circumstances to approve you for a new interest only period.
What’s interest only?
A home loan repayment typically consists of two parts:
- The principal component – the amount you borrowed (loan balance)
- The interest component - the interest the bank charges on your outstanding balance
An interest only home loan is where you can choose your minimum repayments to only cover interest charges on your home loan for an agreed period of time.
This means that your loan balance does not reduce during an interest only period as you are not making any principal repayments.
Interest rates for interest only home loans tend to be higher than principal and interest home loans.
An interest only home loan may be suitable if you’re looking for:
- Ways to maximise tax deductions as a property investor
- A temporary way to reduce your short term costs and the flexibility to manage a temporary income reduction (e.g. if you're receiving parental leave or paying educational costs while you’re studying)
An interest only period is available for investment home loans and owner-occupied home loans.
Important things you should know
You’re paying more interest over the life of your home loan
Because you’re only paying the interest amount off your loan during your interest only period, you’re not paying the loan balance (principal component) which means you’re paying more interest over the life of your loan.
If you pay both the principal and interest you’ll reduce your loan balance earlier in the loan term, which means the amount of interest payable will also reduce, because interest is calculated on the outstanding balance of your home loan.
Interest only periods
You can switch between principal and interest repayment options during the life of your loan, however there are limits on how long you can have interest only periods for.
- Maximum interest only period at any one time is 5 years for all home loans
- Total interest only periods allowed during the life of the loan is 5 years for owner occupiers and 10 years for investors
- Interest only is unavailable in the last 5 years of your loan term
These limits apply when you request a new or extended interest only payment.
Your interest only period expires
As your interest only period is for a short time, eventually you'll need to pay off your loan balance. When your interest only period expires, your repayments will change to principal and interest. This means your repayments will increase and you’ll start to pay off your loan balance.
To prepare for this change and remain in control, know your expiry date and plan accordingly.
To find the expiry date log on to NetBank > View account > Account Information. Make sure you've selected your interest only home loan from the list.
How interest only affects repayments
With an interest only loan you choose to make repayments that only cover the interest amount (for a short period). Interest only payments are lower than if you were paying both the principal and interest components, however your loan balance isn’t reducing.
At the end of an interest only period, the balance of the loan must be paid back to the bank over the period remaining before the end of the loan. This means that the principal and interest repayment will be higher than it would have been prior to the interest only period.
In this example, Jo has taken out a home loan of $500,000 for 30 years.1
- If she was to make principal and interest repayments at 3.99% p.a. from year 1 her monthly repayments would be $2,385
- If she decides to make interest only payments:
- For the first 5 years of her loan at 4.61% p.a., her monthly payments would be approximately $1,921
- In year 6 her payments would revert to principal and interest at 3.99% p.a. Her monthly repayments would then increase to $2,637
This means that over the life of her loan, Jo will pay an additional $47,867 interest – for the first 5 years of being on Interest Only.
Work out what your repayments might be using the repayment calculator.