Prospect of end of interest-only mortgage fills me with dread

Q. I purchased two residential investment properties in the middle of 2007. I took out loans on an interest only basis. The interest-only period on those loans is coming to an end in December of this year. The capital repayments on the loan will probably be impossible for me to finance. I don’t think that I can sell the houses in the current climate and even if I could, I would have to sell them at a loss. Is there anything that I can do to reduce the financing cost?

A. Unfortunately, you are not alone in facing the above situation. There are many people who are facing the prospect of crippling loan repayments commencing on properties that may already have some negative equity. The following is a list of suggestions starting with the best from your perspective and ending with the worst. The suggestions are not mutually exclusive. You could end up with a solution that includes a number of the suggestions when dealing with the bank. It is vital that you engage with the bank now as this gives you the best chance of negotiating something reasonable.

The possibilities are;

• Look for a further period of 12 months interest only – this could be difficult to achieve in the current climate but if both properties are renting solidly and the rents are matching interest, you might be able to push this through

• Look for an interest only loan for, say, 50% of the borrowing with the rest reverting to a capital and interest loan.

• Maximise the term of the loan (your age would be a limiting factor in this ).

• Sell one house with an agreement that the bank will agree terms on the rest of the loan on a favorable basis

• Sell both houses

All of the suggestions are designed to reduce the immediate cashflow requirements until such time as you can sell the houses at least at a break even position. If you were able to get 50 per cent interest only and the rest placed on a 40-year mortgage, this may put you in a position whereby you could continue with the two properties for a few years until the property market picked up and properties started selling again and prices began to increase. No matter what you negotiate with the bank, you may have to forgo the opportunity of a future profit or even take a current loss to sort out potential cashflow problems.

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