Can you extend an interest-only mortgage repayment period?

Typically interest-only repayment terms are for a set period, usually a few years. When the interest-only period ends you’re expected to start repaying the balance on the principal, which is the amount you borrowed, and the interest. 

This will make your repayments significantly higher than the interest-only repayment, as you have essentially not paid off any of your loan principal, and just shortened the loan term. 

If you opted for the interest-only repayment period because you were short of cash and still find it difficult to manage expenses, you could ask if your lender will extend the term. However, if you’re doing better financially - and don’t have other unmanageable debts - you should consider returning to principal and interest repayments. 

Lenders may not always give you an automatic extension on the interest-only repayment period. You may need to prove your eligibility. Also, the conditions of the mortgage might restrict the total duration of the interest-only repayment period, which can limit your chances of getting an extension. 

You should financially plan for making full repayments as you near the end of the interest-only mortgage term and pre-empt a sudden financial shock if you don’t get an extension. You could also look into if you can refinance the mortgage and get a lower interest rate, making repayments more manageable.

How long a lender will allow you to have an interest-only mortgage will vary between lenders and also depend on if the property is your residence or investment property. For instance, lenders may offer owner-occupiers an interest-only term of 5 years but let investors continue paying just the interest for up to 10 years. 

Depending on your loan type, you may not be able to extend the interest-only period for more than the original term. However, you may be able to switch to a principal and interest repayments at any time, even before the interest-only period ends and then switch back if needed. 

Ideally, you should discuss the lender’s loan repayment options and policies before signing the mortgage agreement. The lender may assess your ability to repay the remainder of the loan once the interest-only period ends.

If you’re an investor, you may find it profitable to take out or switch to an interest-only mortgage as you can get a tax deduction on the interest you pay. On the other hand, if your mortgage comes with an offset account and you’ve nearly repaid the principal, you may want to use the money in the offset account for investments or repaying other debts. 

You can do this while paying only the interest on the mortgage without closing the mortgage. In this circumstance, the lender may also agree to longer extensions of the interest-only period as they would continue to earn fees for the duration the mortgage remains unsettled.