Typically, borrowers transition to principal and interest (P&I) payments once their interest-only (IO) home loan term expires. IO home loans are mortgages where the borrower only pays the interest on the loan for a set period of time, typically between one and five years. During this period, the borrower's repayments are lower because they are not paying off the principal of the loan. At the end of the interest-only period, the borrower will need to start paying off the principal of the loan as well as the interest, which will increase their repayments.
In contrast, a P&I loan requires the borrower to make regular repayments that include both the principal and interest components of the loan. This means that the borrower is gradually paying off the loan over time, and their repayments will decrease as the loan is paid down.
One of the benefits of an IO loan is that the repayments are lower during the interest-only period, which can help borrowers manage their cash flow or invest the difference elsewhere. However, the downside is that the borrower is not paying off the loan during this time, so they will end up paying more in interest over the life of the loan.
On the other hand, a P&I loan allows borrowers to pay off their loan faster and ultimately pay less in interest over the life of the loan. While the repayments may be higher in the short term, borrowers who can afford the higher repayments will benefit from lower overall interest costs and a quicker path to owning their home outright.
Requesting an extension to the IO period or moving back to an IO loan after being on P&I is not as simple as it used to be. In general, lenders have become more cautious in granting such requests in recent years due to increased regulatory scrutiny and a greater focus on responsible lending practices. This means that lenders may be more thorough in their assessment of a borrower's financial situation and ability to repay a loan under different repayment schedules.
Overall, the exact reasons why a request for a change in repayment schedule from P&I to IO is more onerous now will depend on a variety of factors, including the lender's policies and procedures, regulatory requirements, and the borrower's financial situation.
Borrowers are typically required to provide detailed financial information, including income and expense statements, tax returns, bank statements, credit history, and outstanding debts. An up to date property valuation may also be required.
Ultimately, the choice between an interest-only home loan and a principal and interest loan will depend on the borrower's individual financial situation and goals. It's important to speak to a financial advisor or mortgage broker to get advice on which type of loan is right for you.
