Interest-Only Period Ending? What Happens Next and Your Options in 2026

Why this matters more right now

On 29 September the Reserve Bank lifted the cash rate to 4.60%, its fourth rise this year and the highest level in around fifteen years. Lenders have been passing it on, and Canstar's tracking puts the average owner-occupier variable rate somewhere around 6.5% to 6.6%. The Board meets again on 3 November and has said plainly it can lift again if it needs to.

At the same time, values have been easing. Cotality's September figures had Sydney down about 1.4% for the month and roughly 7% over the year, with national values falling for a sixth month in a row.

For most borrowers that is an uncomfortable backdrop. For anyone whose interest-only period is about to end, it is a double hit: the repayment is about to jump anyway, and the rate it jumps at is higher than it was a year ago. If that is you, here is how it works and what you can do about it, ideally well before the date arrives.

What actually happens when interest-only ends

During an interest-only period you only pay the interest, so the loan balance does not go down at all. When the period ends, the loan switches to principal and interest. The catch is that you now have to repay the full balance over fewer years, because the interest-only years came out of your original loan term.

A simple example, using an illustrative rate of 6.5% (your actual rate will differ):

• Interest-only on $800,000: about $4,333 a month.
• Principal and interest over the remaining 25 years: about $5,402 a month.
• The difference: roughly $1,070 a month, or close to a 25% jump, overnight.

For comparison, the same $800,000 on principal and interest over a full 30 years would be around $5,057 a month. That gap is the price of the interest-only years, and it is why the switch catches so many people off guard.

Moneysmart makes the same point with its own example: lower repayments up front, a noticeably higher repayment later, and possibly more interest paid over the life of the loan. It also flags the risk that matters most in today's market: if values do not rise, you may have built little or no equity.

Step 1: find your date and your real number

The first job is simply knowing where you stand. I regularly speak with people who are not sure when their interest-only period ends, or who assume their lender will extend it automatically. Neither is a safe assumption. Pull out your loan documents or check your banking app and confirm:

• The exact date your interest-only period finishes.
• Your current rate, and whether it changes when the loan reverts. Interest-only rates are often a little higher, and the revert rate is not always the sharpest one your lender offers.
• Your new repayment on principal and interest over the remaining term. Your lender can tell you, or I can work it out with you.

If you have six months or more up your sleeve, you have options. Inside the last month or two, those options start to narrow.

Step 2: decide whether you actually want to extend

Extending interest-only is not automatically the right move. It keeps repayments lower for now, but the balance stays where it is, and the eventual switch to principal and interest gets steeper because the term keeps shrinking.

Interest-only can make sense for some investors, particularly where there is other non-deductible debt (like the home loan) that should be paid down first, or where cash flow is genuinely needed elsewhere. The tax side of that is a question for your accountant, not your broker.

For an owner-occupier, the case is usually weaker. If you are only on interest-only because it was the default when you bought, switching to principal and interest and getting the balance moving is often the healthier long-term choice, provided the budget can handle it.

Step 3: if you want to extend, expect a fresh assessment

This is the part most people do not expect. An extension is generally not a formality. Lenders usually treat it as a new credit decision, assessing you against today's income, today's expenses, today's rates and today's serviceability buffer, not the rules that applied when you first borrowed.

With rates higher and values softer, some borrowers who sailed through five years ago now find it tighter. That does not mean the answer is no. It means it pays to:

• Start the conversation early, ideally three to six months before the end date.
• Have current payslips, tax returns and statements ready, so the lender is not waiting on you.
• Tidy up anything that hurts serviceability, such as unused credit card limits you could reduce.
• Ask what the rate will be on the extension, not just whether it is approved.

Step 4: test the market before you accept the revert rate

When a loan reverts, people tend to accept whatever rate their lender hands them. That is often where they lose the most. Ask your lender to reprice first. If they will not move, it is worth checking what other lenders would offer, either to switch to principal and interest at a sharper rate, or to refinance onto a new interest-only period if that suits your plan.

One honest caveat in a falling market: refinancing depends on a fresh valuation, and valuations have come down with prices. If your equity was thin to start with, check where your loan-to-value ratio sits now before you get attached to an advertised rate. If it has crept above 80%, Lenders Mortgage Insurance may come back into the picture with a new lender.

Step 5: soften the jump if principal and interest is the answer

If you are switching to principal and interest and the new repayment is tight, there are ways to make the transition easier:

• Start paying extra now. If your loan allows extra repayments, lifting what you pay before the switch gets you used to the new number and chips away at the balance.
• Use your offset account. Every dollar sitting there reduces the interest charged, which lowers the overall cost of the loan.
• Look at the loan term. In some cases, extending the remaining term can bring the repayment down, though you will pay more interest over time. It is a trade-off worth understanding before you sign anything.
• Split the loan. Some borrowers keep part of the loan interest-only and move the rest to principal and interest, which spreads the jump out.

If the new repayment is beyond your budget

If you have run the numbers and the principal and interest repayment simply does not fit, speak up early. Lenders have hardship processes, and they are far more flexible before a payment is missed than after. Moneysmart also points to free, confidential help from a financial counsellor on the National Debt Helpline, 1800 007 007. Waiting and hoping is the one option that reliably makes things worse.

The short version

• Know your end date, your current rate and your new repayment.
• Decide whether extending genuinely suits your plan, rather than doing it by default.
• If you extend, apply early and expect to be reassessed on today's rules.
• Never accept a revert rate without asking for better, and check your equity before refinancing.
• If the numbers do not work, talk to your lender before you fall behind.

The end of an interest-only period is one of the most predictable events in a loan. You know the date years in advance. The people who handle it well are simply the ones who look at it six months early instead of six days early.

If your interest-only period is ending in the next year and you would like a hand working out the right path, whether that is extending, switching or refinancing, I am always happy to have a free, no-obligation chat. With access to more than 70 lenders, it usually does not take long to see what your realistic options are.

This is general information only and not personal financial advice. Everyone's situation is different, so please get in touch and we will look at yours together. For the tax side of interest-only lending, please speak with your accountant or a licensed adviser. Rates, property values and lender policy change quickly, so treat the figures here as a snapshot in time.

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