The interest-only time bomb
Many people are unaware that their interest-only loan, negotiated when they bought their investment property, does not automatically renew. I.e. If your interest-only period expires, normally after 5 years, it automatically reverts to principal and interest unless you apply for an extension.
This is where the problem could potentially lie. Essentially, to have it extended, in most cases, you need to re-apply for another 5 years. If you don't qualify under normal mortgage criteria the bank would not extend it.
The Reserve Bank estimates that over the next 12 months, $13 Billion worth of debt is due to come off its interest-only agreement.
What could cause you not to qualify?
- Husband or wife has stopped work to look after the kids.
- You are earning less income than you did when you applied for the loan.
- You are nearing retirement and the bank views your income potential differently.
- Lending criteria have tightened and you don't qualify anymore with the same income.
- You had another child which adds cost to the day-to-day living expenses.
- You bought a boat, or anything for that matter, on hire purchase.
What can be done?
- Start budgeting for principal and interest payments.
- Start saving towards an emergency fund.
- Consult with me so that we can prepare, in advance, for what might eventuate.
- Don't over-extend yourself when buying a rental property.
Note: I personally buy investment properties with a structure of interest-only loans. Thus, I am not against the principal but you need to plan and budget accordingly.