Can you moved from fixed P&I loan to fixed interest-only loan?

Hi there,

I am just playing out some scenarios.

Lets say I am on a fixed rate P&I loan started in October 2020, at 2.59% over a 3 year period.

Lets say today I want to switch from P&I to Interest-Only.

Am I allowed to do this without any 'break costs' assuming I am still within the same 3 year period? If bank allows it, how much will the interest-only rate increase to?

Thanks.

 

This would be classed as breaking the loan with most lenders I would think. But as fixed rates are rising the break costs may be low to nil
The rate would depend on the bank.

 

I'm confident any lender would consider this a breaking the loan an include a break cost. However with that said you can always check the break cost and then consider if it is worth the cost in the long run. A good mortgage broker would be able to help you out here.

 

Most banks will require full assessment from changing to P&I to IO.

And to do this they will also need to break your fixed loan.

 

Break Costs may apply
New Serviceability check will apply due to switching from P&I to IO, essentially the same as applying for a new loan.

 

Thanks all.

In current environment, lets say I am with one of the 'big 4' and paying 2.49% on fixed. If I was to switch to fixed but on interest-only, how much higher do you think the interest rate would be?

 

You can just look at the rate on the bank's website - but perhaps not with their silly high rates and ask for a discount policy.

Prob 3% or more

 

I've recently had a friend break their three year fixed rate loan within 2 months of settling (I have no idea why) but they didn't incur any break costs so it's definitely worth checking the cost. But, it is also worth making sure a fixed rate suits you before signing up as in most cases it will be an expensive exercise to break.

 

Perfect - thanks mate. That's good to know. I will explore.

 

The break cost calculation is likely based on same product loan use eg Owner Occupied or Investor. You cant break a fixed P&I owner occupied and expect to reduce the margin by asking the lender to break using the investor rate.

 

There is a tax strategy to them doing this. Break costs incurred prior to sale are a deductible outgoing for a IP. When it occurs as a consequence of sale (eg settlement date) then the break cost is a CGT cost and loses 50% of its deductible value. They may have learned the cost was $0 and said - just do it.

 

We had a client settle a about a month ago on a fixed rate. A change in circumstances lead him to want to debt recycle and he has just broken the fixed loan with the break costs being nil. CBA was the lender.