What happens when the loans interest only period lapses?

[jaspn]

Hypothetical situation: Say if I purchase an IP tomorrow which rental yield is high enough to almost cover outgoings with very little intervention from me - interest, rates, body corp. etc. Now let's also assume my investment loan is fixed for 5 years, interest only.

When that 5 years lapses, from what I have heard from the web and my own bank, you're required to begin paying P+I, at an interest rate that's [most likely] higher than the super low rates we have today. This would result in much higher repayments.

Any good property manager is active in raising rents, but can I assume that the jump in rental income is enough to cover the extra repayments in 5 years? What are people's strategies to cover themselves without getting into trouble when this happens?

 

[Aaron_C]

Depending on the lender, at the end of the 5 year period, you can either ask for an extension of it, or refinance to get another 5 years. Or if you are that concerned, why not go to a lender like Westpac which can have up to 15 years interest only?

 

[alexlee]

Hypothetical situation: Say if I purchase an IP tomorrow which rental yield is high enough to almost cover outgoings with very little intervention from me - interest, rates, body corp. etc. Now let's also assume my investment loan is fixed for 5 years, interest only.

When that 5 years lapses, from what I have heard from the web and my own bank, you're required to begin paying P+I, at an interest rate that's [most likely] higher than the super low rates we have today. This would result in much higher repayments.

IO and P&I is separate from fixed / variable.

Having 15 years IO fixed for the first 5 years doesn't change the risk you seem to be concerned about (higher rates in 5 years). You could fix for longer, but that has its own risks.

 

[geoffw]

Any good property manager is active in raising rents

Any good property manager will be aware of the market. Sometimes that means dropping rents as well- as is happening in Canberra ATM.

As regards the loan- P&i is not the end if the world. Any principal that you pay down becomes equity available in the future. Presumably your own pay would have risen, so you may have some extra available.

I was worried when one of my properties reverted to P&i. I had the option of renegotiating, but chose to stick with the P&I. I haven't really noticed the extra payments. For me, the rent had risen substantially in the meantime which did help.

 

[Spectre]

some lenders only allow i/o 5 years and then thats it. Others you can extend past the 5 year period - i.e. do a renewal at the end of 5 years where they reassess you or you swap lenders. Then other lenders will let you go for 10-15 years I/O which for some just makes things easier to deal with.
By rights most mainstream lenders have the facility to renew the i/o period after the 5 years though.

 

[MelbGal]

I have 10 yr IO loans and at the end I may choose to refi for another 10yr IO period. If I decide to go P&I then I will ask them to apply the same discount on my rate that I have on my other SVR loans.

Same with when I come off my pre-paid imterest in advance period. The loan reverts to an IO on standard SVR rate but the banker told me to call up and he would apply the same discount rate to this loan that I have negotiated on my other loans - got this in writing and he added a diary note.

 

[skater]

Concerning rents:

As Geoff said:

Any good property manager will be aware of the market. Sometimes that means dropping rents as well- as is happening in Canberra ATM.

.

Just like the purchase price of properties is governed by supply and demand, so are rents. So, what may happen (or may not), is that property prices get higher. That's great, you've got some lovely Capital Gain. But the downside to this could be that more & more tenants are purchasing their first homes, which means there is an undersupply, so rents drop.

Over time, property stalls, or even goes backwards for a while. If you have bought into a city with strong demand, then over time, you have more & more people wanting to live in an area. If there is no new building works happening, demand for rents will be very strong. During this time, rents will play catch up and you may find that you have to put your rents up significantly every six months, or face having a property that has below market rents.

 

[redwing]

I have 10 yr IO loans and at the end I may choose to refi for another 10yr IO period. If I decide to go P&I then I will ask them to apply the same discount on my rate that I have on my other SVR loans.

Same with when I come off my pre-paid imterest in advance period. The loan reverts to an IO on standard SVR rate but the banker told me to call up and he would apply the same discount rate to this loan that I have negotiated on my other loans - got this in writing and he added a diary note.

He'll have moved on

 

[MelbGal]

He'll have moved on

That's why I have the diary note on file and also spoke to their customer complaints area and he gave the same advice, get written confo and diary note. Doesn't matter who I speak to, they advised me to ring their retention area.

Apparently this bank has a process where their paperwork can only note the current discount for the current loan product and can't write in the future discount for the future product it reverts to. Strange.

Anyway if all else fails I just refi with another bank but they are already giving me the same discount svr on another loan so it would seem very strange that they wouldn't apply the same to this loan.

I'm not too worried.

 

[jaspn]

From what I have gathered from the responses thus far, there's two probable factors to cover the extra repayments; Increased rents and my higher wage.

At first glance, it's an attractive time for people to invest right now with such low interest rates. At the same time I can see people getting into trouble in the future when rates rise. I guess that's why it's so important one runs the numbers at different interest rate scenarios to see if they can still afford it when the rates rise. Relying on higher income and increased rents alone sounds unwise, regardless of historical data.

 

[b simpson]

I had a 5 year IO loan once. The contract said that it would revert to " the standard" rate. I wrongly assumed that was the banks variable rate.

How wrong was I! The new rate was 14% and their variable was around 8%. After many phone calls and frustration they refunded the additional interest a few months later. Then when I sold the house they lost numerous paperwork from my conveyancer, repeatedly gave different fax numbers so they could claim the didn't receive them which delayed settlement by a week. Won't use them again end of rant...

 

[jaspn]

I had a 5 year IO loan once. The contract said that it would revert to " the standard" rate. I wrongly assumed that was the banks variable rate.

How wrong was I! The new rate was 14% and their variable was around 8%. After many phone calls and frustration they refunded the additional interest a few months later. Then when I sold the house they lost numerous paperwork from my conveyancer, repeatedly gave different fax numbers so they could claim the didn't receive them which delayed settlement by a week. Won't use them again end of rant...

Who was the lender?