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An interest only loan expiring produces one of the largest single repayment increases a borrower will meet, and it is routinely underestimated because two things happen at once.
Principal repayments begin, and the principal is compressed into a shorter remaining term than the loan started with. On a thirty-year loan with five years interest only, the principal is repaid over twenty-five years rather than thirty.
With an interest only loan expiring, the loan converts to principal and interest automatically. No action is required from you, and the notice commonly arrives as nothing more than a letter.
The rate may also change. Interest only can be priced above the equivalent principal and interest rate, so some borrowers see the rate improve at the same moment the repayment rises sharply.
The balance is the other feature. Interest only means you have repaid no principal, so the balance at the end is what it was at the start, while the term left to repay it has shortened.
Work the new figure out before the letter arrives. The interest only calculator will show the shape of it.
On an interest only loan expiring, three effects stack, which is why estimates made in your head come out low.
| What changes | Effect on the repayment |
|---|---|
| Principal repayments begin | The largest single component. You move from paying interest only to repaying the debt as well |
| The remaining term is shorter | The same balance is repaid over fewer years, so each repayment is larger than it would have been from day one |
| Rates have risen since the term was set | The cash rate sits at 4.85 per cent after four rises during 2026, and lending rates have followed, so the interest component may also be higher than when the term began |
Against those, the rate on principal and interest can be lower than the interest only rate, which offsets a little of it but nowhere near all.
The remaining term is the part worth checking on your own loan. Two borrowers with the same balance and the same rate can face materially different repayments purely because one has five years less to run.
An interest only loan expiring in 2027 was typically written in a very different rate environment, which is why the increase can be larger than a borrower who has been through one before expects.
An interest only loan expiring leaves four routes, and the right one depends on why the loan was interest only in the first place.
Let it convert, if the new repayment is manageable. It costs nothing to arrange and begins reducing the debt, which is why it is the route to rule out first rather than last.
Apply to extend the interest only period, covered below. Refinance to another lender, which resets both the pricing and potentially the term. Or restructure, splitting the loan so part converts and part does not.
Each needs a fresh assessment except the first. That matters, because qualifying today is not the same as qualifying when the loan was written. See how the serviceability buffer works.
Extending the interest only period is an application, not an entitlement. The lender reassesses you against current policy and current rates, with the buffer applied on top.
Lenders are generally more willing to extend on investment lending than on an owner-occupied loan, and many cap the total interest only term. Both vary by lender and are worth asking about directly.
There is a cost to extending beyond the fees. Every further year of interest only compresses the principal into fewer remaining years, so the eventual repayment when the loan does convert is higher again.
An extension is therefore a cash flow decision rather than a saving, and it is worth being clear which one you are making. We will model both.
Start six months out rather than three. An interest only loan expiring needs longer than a fixed term because the options mostly require a fresh assessment.
At six months, work out the converted repayment on your actual balance and remaining term, and check whether you would still qualify on today’s policy with the buffer applied.
At four months, decide which of the four routes you want and start it. An extension or a refinance both take time, and a valuation may be needed.
At two months, have it in place. Letting the term roll over while paperwork catches up means paying the converted repayment anyway, which is the outcome you were trying to manage.
And if the converted repayment is simply not affordable, raise it with your lender early rather than late. You have a right to ask about hardship assistance, and the asking is an enquiry that triggers nothing.
Entering an arrangement is a separate matter. It is recorded on your credit report as financial hardship information, which other credit providers can see, with the markers removed a year after the arrangement ends.
That is worth knowing before you agree to one, and it is not a reason to go without assistance you actually need.
A large share of interest only lending is investment lending, and the usual reason is that interest on an investment loan has been deductible while principal never is.
That calculation is changing. From 1 July 2027, negative gearing is restricted to new builds, and properties held at 7.30pm on 12 May 2026 are exempt from that restriction while later purchases are not.
So an investor with an interest only loan expiring should look at both dates together rather than separately. The structure that made sense under the old treatment may not under the new one.
That is tax rather than credit, so your accountant should confirm your own position. See investment lending or call +61 447 959 546.
The loan converts automatically to principal and interest, usually with nothing more than a letter. No action is required from you, which is why the repayment increase catches people out.
The rate may also change, since interest only can be priced above the equivalent principal and interest rate, though that rarely offsets much of the increase.
More than most people estimate, because three effects stack: principal repayments begin, the same balance is now repaid over a shorter remaining term, and rates have risen since most current terms were written.
Run your own loan size and remaining term through a calculator rather than relying on a rule of thumb, because the term left makes a large difference.
You can apply to, and it is an application rather than an entitlement. The lender reassesses you against current policy and rates with the buffer applied.
Extensions are generally easier on investment lending than on an owner-occupied loan, where total interest only terms are usually capped and lenders are more reluctant.
They do different things. Converting begins reducing the debt and costs nothing to arrange. Extending preserves cash flow but compresses the principal into fewer remaining years, so the repayment when the loan eventually converts is higher again.
It is a cash flow decision rather than a saving, and worth modelling both ways on your own figures.
Not automatically. Any extension, refinance or restructure is a fresh assessment against today’s policy, today’s rates and the buffer on top, which is a different test from the one that applied when the loan was written.
Letting the loan convert needs no assessment, which is one reason it is worth checking your position early rather than late.
Sometimes. Interest only can be priced above the equivalent principal and interest rate, in which case the rate improves at the same moment the repayment rises. The rate improvement is small relative to the effect of principal repayments beginning, so it softens the change rather than removing it.
How interest only loans work and what changes at the end of the term is explained by ASIC Moneysmart. Your own figures should be confirmed with your lender.
Paritosh Wadhwani | Director and Principal Broker, APW Finance
Member of the Finance Brokers Association of Australia (FBAA). Arranging residential, commercial and specialist lending for Sydney clients across a panel of more than 50 lenders.
APW Finance Pty Ltd, 304/20a Lexington Drive, Bella Vista NSW 2153. Email: info@apwfinance.com. Phone: +61 447 959 546.
ACN 620 646 479 | ABN 79 620 646 479
This guide is general information only. It does not take into account your objectives, financial situation or needs, and it is not financial or credit advice. Lending criteria, interest rates, duty thresholds and government schemes change, and every application is subject to lender approval.
Consider whether this information suits your circumstances and seek independent advice before acting. Figures quoted are current at the date below and should be confirmed before you rely on them. Last reviewed: October 2026.
APW Finance Pty Ltd delivers expert lending solutions with personalised service, empowering clients across residential, commercial, and business sectors.