Today, we will be discussing interest-only loans and how they can help alleviate financial stress caused by soaring interest rates and increasing loan repayment pressures. We have received numerous inquiries from customers seeking information about converting their principal and interest loans into interest-only loans or extending their existing interest-only loan periods. In this video, we will provide a comprehensive introduction to the principles, application requirements, and considerations of interest-only loans to assist you in making informed decisions.

Let's begin by understanding the principles and requirements behind interest-only loans. When banks approve an interest-only loan, they evaluate it as they would a new loan application. Their primary concern is whether your total income is sufficient to repay the existing loan. The key difference between reviewing a principal and interest loan and an interest-only loan lies in the calculation of repayment amounts and loan terms. For instance, if the bank grants you a 30-year loan term, they calculate your repayment amount based on the full 30 years for a principal and interest loan. However, for an interest-only loan, let's say the bank approves a 5-year interest-only period. Since you won't be repaying the principal during this period, they base the repayment calculations on a 25-year term (30 years minus the 5-year interest-only period). Therefore, when the loan amount remains the same, the income requirements for applying for an interest-only loan are higher than those for a principal and interest loan.

Moreover, the approval duration for interest-only loans varies depending on the type of property you own. For owner-occupied properties, banks usually grant a fixed 2-3 year interest-only period, which cannot be extended. This is because banks aim to ensure that borrowers do not carry an outstanding loan into retirement, thereby pressuring them to continue working. On the other hand, for investment properties, the approval period can be more flexible. In general, you can apply for a maximum interest-only period of 5 years at once. Banks consider investment property loans more manageable to repay through property sales, as it does not significantly impact the borrower's quality of life. Therefore, the criteria for approval are relatively more lenient.

Whether you intend to convert from a principal and interest loan to an interest-only loan or extend your existing interest-only loan, we strongly recommend consulting your mortgage advisor or the bank to assess whether you meet the income requirements for applying or extending an interest-only loan.

For customers seeking to apply for or extend an interest-only loan, switching to another bank may be more beneficial than staying with your current bank. There are three main reasons for this:

1. Different banks have distinct policies, which can lead to different outcomes even with the same income.

2. Loan term calculations differ among banks. By switching to a new bank, you can apply for a fresh 30-year loan term. As mentioned earlier, with the same loan amount, a longer loan term results in lower monthly repayment amounts, reducing the income requirements imposed by the bank. Therefore, while your income may not meet the requirements for an interest-only loan with your current bank, it may be sufficient when applying with a new bank.

3. Understanding the loan-to-value ratio (LVR) is crucial. For instance, if you wish to apply for an interest-only loan for an investment property and your previous loan-to-value ratio was 60%, a decrease in property prices might increase your current loan-to-value ratio to 70%, exceeding the bank's upper limit for investment property loans. In such cases, your current bank may be unable to extend the interest-only period. However, by applying with a new bank, this can be considered a refinance application, which is not subject to the high loan-to-value ratio quotas set by the central bank. This exemption from LVR requirements offers fast approval and favorable interest rates.

Switching to a new bank when refinancing your loan offers several benefits. Firstly, your mortgage advisor can review your current loan structure and conduct a comprehensive financial health check. This assessment helps identify areas that can be optimized, increasing the flexibility of your loan, protecting your assets, and reducing the bank's control over all your assets. Additionally, when refinancing to a new bank, you may be eligible to receive a cash rebate that your current bank cannot provide.

However, it's important to note that there are certain costs associated with refinancing to another bank. If you haven't completed the full term of your current loan with the existing bank, you will be required to repay the cash rebate provided to you for that year. Additionally, there will be costs involved, such as lawyer fees and breaking fees, when switching banks.

In conclusion, applying for an interest-only loan is not a simple decision. It requires careful consideration and calculations to make the most favorable choice. If you have plans to convert to an interest-only loan or extend your existing interest-only period, we strongly advise consulting your mortgage advisor or contacting us for personalized advice.

We hope today's content has provided you with valuable insights. Based on your individual situation, we can offer specific recommendations. If you require assistance, please reach out to us. We are here to conduct a comprehensive assessment for you and tailor a personalized solution.

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.