Changes to lending regulations are forcing banks to change the way they assess requests to switch or extend Interest Only repayment periods on interest only home loans. These changes effect customers who want to extend Interest Only repayment periods, as well as those wanting to switch from Principal and Interest to Interest Only repayments.
Interest Only Repayment Switch Process
CBA is the latest Lender to announce changes to the way they will assess and process Interest Only term extensions and Interest Only repayment switches.
In the past, CBA customers would simply call the bank and request to switch to Interest Only repayments over the phone. Customers were also able to change their existing loan from P&I to IO over the phone. Other banks applied a very similar process when customers requested to switch to or extend Interest Only terms.
In order to meet the new Regulatory and Responsible Lending Commitments, banks are now required to assess the clients’ situation when requesting Interest Only terms. From now on, clients need to pass a serviceability assessment in order to qualify for Interest Only repayments.
The Bank’s serviceability assessment will consider the following:
- The customer’s employment and income details have not altered markedly since the original loan application
- The customer’s existing debt commitments. This includes the customer’s satisfactory conduct in repaying any loans
- The customer’s living expenses are within a tolerable range. Again, they need to be in line with what was in the original loan application
If you are thinking of switching to Interest Only repayments, you need to have a ‘needs-based’ conversation with your Mortgage Broker. You need to fully understand the financial impacts of choosing this option.
Interest Only Terms
In general, the maximum Interest Only Term is based on the type of loan. For Owner Occupied Home loans, the maximum IO term is 5 years. For Investment loans, the maximum IO term is 10 years. Customers who are ineligible to switch to Interest Only can still submit a full application. This will enable them to be considered for approval for a future IO repayment period.
Interest Only Suitability
Interest Only is NOT suitable for customers who are in financial difficulty. If you are experiencing difficulties in making repayments based on P&I terms, it is not advisable to just switch to Interest Only repayments. Customers that are facing financial hardship should contact the Financial Assistance Solution team within their bank.
Please contact your Mortgage Broker for advice on whether it would be beneficial for you to switch to Interest Only repayments. The OneSite Team are always available and happy to assist you!