Interest Only periods
- Thread starter vmmg1992
- Start date
Safe from what? What do you see as the risk of having an IO period that's 'too long' (whatever that means)?
The rational behind an interest only period is not that it's a 'safe option', it's for cash-flow and tax management purposes.
Many lenders have a standard 5 year interest only period. A few can do longer or shorter but some lenders don't give you the option outside of 5 years (you can then re-apply for another 5 years after that).
You may be thinking of a fixed rate period which is a different concept. This is where you lock the rate for a particular period of time (2 and 3 years tends to be the most popular). The benefit of this is that you know exactly what your repayments are for that period. Fixed rates can have principal and interest or interest only repayment types.
Many lenders have a standard 5 year interest only period. A few can do longer or shorter but some lenders don't give you the option outside of 5 years (you can then re-apply for another 5 years after that).
You may be thinking of a fixed rate period which is a different concept. This is where you lock the rate for a particular period of time (2 and 3 years tends to be the most popular). The benefit of this is that you know exactly what your repayments are for that period. Fixed rates can have principal and interest or interest only repayment types.
Only in hindsight will you know the answer. The banks set their rates on what they expect to happen with teams of forecasters based on micro and macro-economic factors among other things.
I remember reading comments from brokers on SS and elsewhere that most of their clients always regret fixing their rates past 3 years. I'm sure there'd be exceptions to the rule also.
I maybe mixing up the fear of locking fixed with the fear of keeping the loan IO for 5 years. I guess if I wish to change the loan back P&I... that would be my only reasoning.
Just curious as to why there is the option to keep the loan IO for a certain number of years when the maximum amount is the most beneficial.
Just curious as to why there is the option to keep the loan IO for a certain number of years when the maximum amount is the most beneficial.
Having the loan as I/O does keep the loan at the maximum amount. This maximizes your tax benefits and minimizes your repayments thus improving your cash flow overall.
If you're not comfortable with I/O repayments and prefer P&I, most lenders will allow you to switch very easily, but you can also simply make extra voluntary repayments on top of the minimum interest payment.
If you're not comfortable with I/O repayments and prefer P&I, most lenders will allow you to switch very easily, but you can also simply make extra voluntary repayments on top of the minimum interest payment.
Not the same thing, obviously. Why would you want to change the loan back to P&I? As others said, that's why IO should usually be used with offset account.
Because it's good to give people choices, and obviously in your case you're looking at the option and thinking it's a good thing. For those who can't control their spending, IO isn't beneficial.
You might be having a bit of confusion between IO terms and fixed terms, as an IO term can be reverted to P&I generally without much issues (generally just a phone call).
If you can handle money and manage a large available balance in offset, the longest IO terms may be suitable for you. You can always emulate P&I repayments by organising automatic payments to your offset account.
If you can handle money and manage a large available balance in offset, the longest IO terms may be suitable for you. You can always emulate P&I repayments by organising automatic payments to your offset account.
I even went IO with my PPOR just in case in five years time I decide to move out and turn it into an investment property. Plus the added benefit of saving cash flow by parking money into the 100% offset account linked to the PPOR mortgage. I would go for the max number of years the bank will allow as it's harder to extend the IO period then change it to P&I.
