IO not reverting to P&I

Say you have a home loan which has been on interest only since day 1. You have been under the impression that the interest only period would last for the standard 5 years, after which it would revert to principal and interest.

But it's now been over 6 years and the loan is still on interest only, and the lender hasn't yet given any indication when it will switch the loan to principal and interest.

What would you do?

 

Depends on the rate you're paying. The problem in this scenario is if you renegotiate the rate, or do anything else, they may realise and correct their mistake. IO rates are great if they're reasonable, but there are plenty of people paying IO rates when their cash flow would be better off paying P&I.

If the rates are reasonable, there's a good case for leaving it alone.

The risk you've got is if it eventually does go back to P&I, you're going to have a much shorter repayment period. Imagine if they switch it after 20 years IO, your P&I repayments would need to pay off the loan in 10 years so they'd be very high. Make sure you've got an exit strategy to cope with this.

Realistically though, I think there's merit in P&I repayments at some point. After 6 year's I'd be inclined to switch it.

 

Thanks for the thoughts.

The interest rate is not great, but the loan has an offset account which currently holds around 50% of the balance of loan, so the actual amount of interest being paid at the moment is okay, and it is tax deductible because it is an investment property.

Seems like having additional time on IO outweighs trying to negotiate a lower interest rate in the circumstances.

 

Which incompetent bank is this?
I would like to do business with them.

 

Maybe log into net banking, check account details page - usually has IO expiry date on it. Perhaps its with one of the lenders that offered a longer IO period at the time?

 

Assume it is PI and set that extra money aside.

 

I have seen several clients with that. One day the lender finds out and recalculates the loan for P&I for a vastly reduced term and the cashflow smashes you. I had one forced to sell as he was 15+ years down the track. He was aged late 50s so they scaled it back to around 10 years and it would have been $9K a month. He sold the property to bypass the issue. Thatwas CBA. Has seen it with several of the majors and they all do similar things.

The loan is outside what was agreed. Their error is your problem.

 

Just to clarify, was the original loan term 25 years in this case? Or are you saying the bank also insisted on reducing the total loan term when they reverted to P&I?

I understand that a longer IO period means a shorter P&I period with higher repayments, but are you saying that the banks can also insist on reducing the overall loan term in these situations?

 

Generally they don't, but there's circumstances where they might do this. In the example from Paul, the bank wants accelerated payments over the minimum due to the borrowers age.

 

I'll be interested to see what ME Bank does with my IO investment loan next Nov when the 5y IO period ends..they have given me a 3 yr fixed rate which extends to Nov the following year (!)

..Not looking forward to the income/expense assessment when the time comes, as I hear they're amongst the most conservative these days