Interest-Only Period Ending? What Happens and What You Can Do

Why repayments jump so much

Two things happen at once. You start repaying principal, and you do it over a shorter period than a normal loan, because the interest-only years used up part of the term.

Say you borrowed $600,000 over 30 years with five years interest-only. At the end of year five you still owe $600,000, and it now has to be repaid over 25 years, not 30. At a 6% rate, for illustration, the payment goes from $3,000 a month to about $3,870. Put your own figures into our mortgage calculator.

Your options

1. Start repaying. If the budget copes, this is the cheapest path over the life of the loan. Nothing to arrange.
2. Ask for another interest-only period. Your lender treats it as a new application and reassesses your income at current test rates. Approval isn't automatic, and lenders are stricter on owner-occupied homes than rentals.
3. Stretch the term. Some lenders will reset the loan to a longer term, which lowers the principal-and-interest payment. This also needs an assessment.
4. Refinance. A new lender may offer interest-only or a longer term where yours won't. The usual what refinancing costs applies.

A fifth option belongs on the list for investors: sell. If a rental only breaks even on interest-only payments and no lender will extend, the numbers are telling you something.

Why extensions get declined

A lender has to be satisfied you could repay the loan on principal and interest over the remaining term. With five years already gone, that test is harder than when you first borrowed. Lower income, more debt, a higher test rate, or the Reserve Bank's debt-to-income limits can each be enough to tip it.

Start three months out

Most lenders write to you before the period ends, but not always with much notice. Ask your lender for the exact date and the new repayment. If you want to extend or move, that leaves time to gather documents and compare lenders before the higher payment starts.

Using interest-only on purpose

For investors, interest-only on the rental while paying down the mortgage on your own home can make sense, because rental interest is generally deductible and home loan interest isn't. That's a tax question for your accountant. Our guide to refinancing rentals covers the lending side.

This article explains how New Zealand lenders generally assess these situations. It is general information, not personalised financial advice, and lender policy changes often — check your own position with a registered adviser. Official sources: Reserve Bank of New Zealand for lending policy and the OCR, and Sorted.org.nz for independent government-backed money guidance.