When Your Interest-Only Period Ends in Retirement

# When Your Interest-Only Period Ends in Retirement

There is a date on your loan contract that most people never look at until it is close. It is the day the interest-only period ends — and it is one of the few genuinely predictable financial shocks in retirement. You can see it coming years out. Almost nobody does.

Here is what makes it worth writing about: the people it hits hardest are not the ones who were careless. Interest-only lending was mainstream, actively marketed, and for a geared investor it was the sensible structure. The cost was simply deferred. This article is about what happens when the deferral runs out, and what you can actually do about it — including the two Centrelink effects that run in exactly the opposite direction to what most people assume.

What actually happens at expiry

During an interest-only period you pay the interest and nothing else. The amount you borrowed does not reduce at all. When the period ends, the loan converts to principal and interest — and the full outstanding principal now has to be repaid over whatever is left of the term.

That is why the step-up is so sharp. It is not a rate rise. It happens even if interest rates never move. ASIC's MoneySmart illustrates the shape of it on their interest-only home loans page with an example where repayments go from around $2,010 a month to around $3,250 when the period ends — that is their illustration on their assumptions, not a figure to apply to your own loan, but it shows the order of magnitude.

The compression is the part people miss. A 30-year loan with five years interest-only repays the principal across 25 years. But interest-only periods are easy to extend while you are still working, and each extension shortens the runway. Extend twice, and the same principal is now squeezed into 20 years. The thing that gives you relief and the thing that makes the eventual cliff steeper are the same lever.

Why retirement makes this harder to fix

At 55, an expiring interest-only period is an administrative task. You extend it or refinance it and move on. At 68, three things have changed at once.

Serviceability. Lenders assess whether you can afford the repayments. Employment income has gone. Pension income and superannuation drawdowns are lower and are assessed differently. The extension that would have been routine can simply be declined — and people usually find this out at the moment they most need it not to happen.

Exit strategy. Where a borrower would be past a certain age when the loan matures, lenders generally want a credible plan for how the loan gets repaid — downsizing, selling the asset, a super lump sum. What age triggers this and what counts as credible varies between lenders, so there is no single number worth quoting. But be ready to answer the question.

Responsible lending. ASIC puts the key concept plainly: credit licensees "must not enter into a credit contract with a consumer, suggest a credit contract to a consumer or assist a consumer to apply for a credit contract if the credit contract is unsuitable for the consumer" (ASIC, Responsible lending). Under those obligations a contract is treated as unsuitable where the consumer could not meet the repayments, or could only meet them with substantial hardship — the detail sits in ASIC Regulatory Guide 209 rather than on that overview page. That obligation exists to protect you. It also means the extension you want may be lawfully refused. In this one situation the rule works against you precisely because it is working.

None of this means you are stuck. It means the fix takes longer and needs to start earlier.

The Centrelink part, which surprises almost everyone

Two effects here, and both run against instinct.

Paying down an investment loan does not improve your assets test

Under the Age Pension assets test, a loan reduces the assessed value of the specific asset it is secured against (DSS Social Security Guide 4.6.6.30). That is the general rule, and it cuts both ways.

Say you use $100,000 of savings to pay down the mortgage on an investment property. The $100,000 of cash leaves the assets test. But the property's assessed value rises by $100,000, because there is now $100,000 less debt secured against it. Net change to your assessable assets: roughly nothing.

Now compare that to paying down a mortgage on your own home. The home is exempt from the assets test entirely, so the $100,000 of cash leaves the test and nothing comes back in to replace it. That is one of the cleanest pension strategies available to a homeowner — and it is covered properly in our article on using home improvements and mortgage paydown as an assets test strategy.

Same $100,000, same action, opposite result — decided entirely by which property the loan is secured against. If you have been assuming that reducing debt must help your pension, it depends, and it is worth checking which case you are in before you commit the money.

As the loan amortises, your assessed income goes up

For an investment property, Centrelink counts your net rental income for the income test — gross rent less allowable expenses, and mortgage interest is one of those allowable expenses (Services Australia).

Once you switch to principal and interest, the interest portion of each repayment shrinks a little every year, and the principal portion grows. Principal is not an allowable expense. So your assessed rental income climbs, year after year, on rent that has not changed at all.

Cash flow gets tighter and Centrelink assesses you as earning more, at the same time, from the same property. That interaction is worth understanding before you decide whether holding the property still makes sense — and it is one to check against your actual numbers, since it depends on your rent, your rate and your remaining term. Our article on how Centrelink treats investment property covers the underlying mechanics in more detail.

Your options, roughly in order

Find the date. It is on your loan contract and usually on your statements. Twelve months of warning is a completely different problem from two months. Do this today if you don't know it.

Work out the new repayment, then start paying it. This is MoneySmart's own advice and it is the single best move available. If the repayment is going to rise by $1,200 a month in a year's time, start paying an extra $100 a month now and build up. You find out whether you can actually afford it while stopping is still an option — and every extra dollar reduces the principal that has to be amortised.

Ask about extending the interest-only period. Sometimes possible. It requires reassessment, it can be refused, and remember it makes the eventual increase steeper. A reprieve, not a solution.

Switch to principal and interest on your own timing rather than letting it happen automatically. Same destination, but you choose when.

Pay down part of the principal from savings or a superannuation lump sum. Check the Centrelink interaction above first, and think hard about whether that cash is better kept as a buffer. Taking a lump sum from super to clear a loan has its own tax and Centrelink consequences — we cover that decision separately in our article on using super to clear the mortgage at retirement, and it is worth advice before you do it.

Look at the whole gearing position, not just this loan. An expiring interest-only period is often what forces a wind-down that was going to be necessary anyway. Our article on winding down negative gearing before retirement is the wider view.

Sell the asset. This is not a failure state and it should not be the last item people read. If a geared investment property has no serviceable path forward, selling on your own timetable is enormously better than selling on the lender's. The tax, timing and Centrelink consequences all deserve planning, which is exactly why it should be considered early rather than as a last resort.

If the repayments are already unaffordable

Ask your lender for hardship assistance. When you do, your lender must consider you for it — that is an obligation on them, not a favour they are doing you. They may be able to alter repayments, pause them temporarily, or set up a payment arrangement.

The reason this is so under-used is embarrassment, and that is worth naming plainly. It is a formal process, it is confidential, and asking early gives you far more room than asking late.

You can also talk to a financial counsellor, free and confidential, through the National Debt Helpline on 1800 007 007. They are experts in credit law and hardship obligations, they do not sell anything, and they will deal with your lender on your behalf if you want. Our article on free help and who to call in retirement lists the other services worth knowing about.

The one-line version

The step-up at interest-only expiry is structural, not a rate movement — so it is entirely predictable, and the whole game is finding the date early enough to have options. Twelve months out, this is a manageable problem with half a dozen routes through it. Two months out, it is a much smaller list. Look up the date.

Sources

• ASIC MoneySmart — Interest-only home loans
• ASIC MoneySmart — Problems paying your mortgage
• ASIC MoneySmart — Financial hardship
• ASIC MoneySmart — Financial counselling
• DSS Social Security Guide 4.6.6.30 — Encumbrances and loans against assets
• Services Australia — Real estate income
• Services Australia — Real estate assets

This article contains general information only. It does not constitute personal financial, tax, credit, or legal advice and does not take into account your individual financial situation, objectives, or needs. Loan terms, extension policies, serviceability assessments and exit strategy requirements vary between lenders, and the figures used are illustrative only — your own repayment change depends on your balance, rate and remaining term. Age Pension outcomes depend on your individual circumstances and on which specific asset a loan is secured against. Before acting on any information in this article, confirm the current rules with Services Australia and consider whether the information is appropriate to your circumstances; specific decisions require advice tailored to your situation. Information is current as at 7 August 2026.

Theodore Karoumbalis is an Authorised Representative (No. 1237098) of iAdvice Technology Pty Ltd, AFSL 526700.