Interest-only mortgage: monthly payments and maturity risks
With an interest-only mortgage, you generally pay only interest during the term. This does not repay the debt. The remaining amount must still be repaid under your contract. A low monthly payment therefore means something different from a low total debt.
Responsible for the content: Ricardo Roso. Updated on .
What remains at maturity?
Without repayments during the term, the amount borrowed remains outstanding. You therefore need to know how you will eventually repay the loan. Options to investigate include building up your own capital, making repayments along the way, a different repayment method or selling the property. Each route has different effects on your available funds and future housing plans.
On sale, the proceeds may be insufficient to cover the debt and selling costs. An expected increase in your home's value is not a certain source of repayment either. Consider amounts and options you can substantiate.
An extension or a new loan is not automatic
If you want to borrow again at the end of the term, a lender must assess this. Factors include income, age and retirement income, property value, commitments and the acceptance policy applicable at that time. Your existing monthly payments cannot guarantee a new loan.
Check your contract for both the loan's maturity date and the end of the fixed-rate period. These are different dates. A higher interest rate may increase your monthly payment even before maturity. Reviewing your situation well in advance gives you more time to spread any necessary measures.
Interest deductibility depends on the loan history
For new owner-occupied home debt subject to the tax repayment requirement introduced in 2013, an interest-only loan component does not qualify for mortgage interest deductions. Transitional rules may apply to existing owner-occupied home debt from before 2013. Even then, deductions are not unlimited: the original deduction period and other tax conditions remain important.
Moving home or remortgaging does not automatically start a new 30-year interest deduction period. If deductions end while the debt remains, your net cost may rise. Have the tax history reviewed for each loan component, including any increases.
Which changes can you have compared?
You can investigate what partial repayment, saving for later or converting a loan component would mean. Additional repayments reduce the debt, but that money is then no longer freely available. Early repayment may also involve a charge. Ask the provider about the allowance and calculation in your own contract.
With an annuity mortgage, you repay according to a schedule. Linear repayment is another option to compare.
An overview gives more clarity than the interest rate alone
For each loan component, list the debt, interest rate, fixed-rate period, maturity date and tax deduction period side by side. Also note your expected retirement income, financial buffers and other loans. Conditions for new or changed interest-only borrowing vary by provider and may be stricter than in the past; a general maximum percentage is not a personal promise.
Through mortgage advice at RFD, you can review your loan and future plans together.
The calculator does not assess your interest-only loan
The maximum mortgage calculator gives an initial indication for an owner-occupied home on an annuity repayment basis, with a 30-year term and a reference rate for NHG with a 10-year fixed-rate period. The result does not assess how much you can borrow interest-only or whether your existing loan can be extended.
For a general starting point, you can calculate an indication of your maximum mortgage.
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Frequently asked questions
Does interest-only mean I never have to repay?
No. There are no regular principal repayments, but the debt remains and must still be repaid under the agreed terms.
Do I need to change my entire mortgage straight away?
The product name alone cannot determine that. First establish your debt, agreements, income and assets. Sometimes it is possible to change one loan component or take a gradual approach.
Can I stay in my home after retirement?
That depends on factors including your retirement income, mortgage costs, assets and contract. Having equity in a home alone does not prove that a new loan is affordable or available.
This is general information, not personal mortgage advice or a finance offer. Your options and the tax implications depend on your circumstances and the provider's terms. Read the disclaimer.
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Sources for this guide
General information from RFD. Sources consulted on . Rules and terms may change.
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