What Is a Balloon Payment Mortgage? Definition & How It Works

A balloon payment mortgage is a home loan where a lump sum payment is due at the end of the loan term. It helps to lower initial monthly payments, but is a potential financial strain when the final payment is due.

It’s a great way to get short-term affordability for anyone looking to buy a home with a mortgage. However, it often comes with increased interest and is not that common across lenders in Australia.

On top of that, the risks of not being able to pay down the loan at the end of the term are even worse. It involves refinancing at higher rates or forcefully selling the property, potentially at a loss if the market conditions are unfavourable.

Before opting for a balloon payment mortgage, it’s wise to shop around and compare different loan options, especially the mortgage comparison rate.

Let’s take a deeper look at balloon payment mortgages.

What Is a Balloon Payment Mortgage?

A balloon payment is a large one-off lump-sum due at the end of a loan term after smaller regular payments during the term. It comprises a significant portion of the original loan, often 20–50% of what you borrow.

This means your final mortgage payment is much larger than the usual interest + principal instalments. It’s a repayment option that helps you ease cash flow or afford a bigger purchase now. 

Essentially, after months or years of lower repayments, you “blow up” that remaining balance in one go. But this requires careful financial planning for you to be able to meet that final payment.

However, balloon payments are rarely offered on residential mortgages in Australia, especially since APRA identifies interest-only loans to owner-occupiers (often with eventual balloons) as a high-risk category. 

Major banks do not offer them, and niche lenders will only consider them for borrowers who meet strict criteria (large deposits, strong surplus income, clear exit plan).

Balloon Mortgages vs Standard P&I Mortgages

In a normal home loan, each payment goes partly to principal (unless it’s in an interest-only term) so the balance hits zero at the end. In a balloon loan, much of the principal is deferred until the end, leaving a large final payment that must be settled altogether.

This means your monthly instalments with a balloon mortgage are lower than on an equivalent fully-amortising loan, since you aren’t repaying much of the principal each month.

While these lower repayments free up cash flow, your total interest cost would end up higher than a standard home loan.

Pros & Cons of a Balloon Payment Mortgage

Pros:

• Lower Monthly Repayments: Balloon payments can significantly reduce your regular mortgage repayments during the loan term. 

• Flexibility: With reduced monthly repayments, you get the flexibility to use the saved funds as you like, potentially in business or investments.

• Potential Tax Benefits: In some cases, balloon payments may offer tax advantages, particularly for businesses. We recommend consulting a tax professional for specifics.

Cons:

• Risk of Financial Strain: The large lump sum payment due at the end of the loan term can create financial strain if you're not prepared.

• Higher Total Loan Cost: Since interest keeps accruing on your total loan balance, you would end up paying more total interest, as the principal amount is not significantly repaid during the term of the loan compared to a regular instalment loan.

• Refinancing Not Guaranteed: Refinancing the balloon payment at the end of the term isn't always guaranteed if you can't make the payment.

What If You Can’t Afford the Balloon Payment?

ASIC requires lenders to ensure balloon loans are suitable (Regulatory Guide 209) to anyone applying for it. This mandates lenders to verify the applicant understands and can cover the balloon at term-end. 

To meet these guidelines, lenders often demand a concrete exit plan before approving such loans. So, the foremost priority of the involved parties is to get the lump sum paid at the end of the loan term, allowing you to keep owning the property.

Refinance

However, if you’re unable to afford it by the end of the term, your next option is to refinance the mortgage. This means borrowing again, but on possibly tighter terms.

But since balloon payment mortgages are considered high risk, being able to refinance is not always guaranteed. And it’s subject to lender approval and may not be possible if your circumstances change or the property’s value falls.

Extend or Modify Loan

Lenders occasionally let you renegotiate, extend the term, or move to a full P&I loan after the initial term.

So this is another option to explore, although a favourable decision from the lender isn’t guaranteed either due to the high risk involved. 

Sell or Downsize

Your last resort is to sell the property or downsize.

If you have another property to move into, you can sell off the existing mortgage and settle the balloon payment with the sale fund. You can buy a smaller property (if needed) with any remaining balance.

Many lenders cap the balloon (often ≤50% of loan amount) and require strong credit and income in the first place. In fact, balloon mortgages typically need a larger deposit and very stable income before approval. 

If your profile is marginal, banks may steer you toward a conventional loan instead.

An Alternative to Balloon Payment Mortgages

Instead of a balloon structure, you could choose a standard interest-only mortgage followed by a switch to P&I (so principal is gradually repaid) or simply a longer amortisation. 

In addition to this, using features like offset accounts or extra repayments can reduce balance without a lump-sum. 

And some borrowers build a larger deposit to avoid the need for a balloon.

So, Is a Balloon Payment Mortgage Right for You?

Consider your cashflow plans, how long you intend to hold the property, and your comfort with risk. Balloons can help in the short term but require discipline: you must be confident you can meet the final payment. 

If you have a clear exit plan (e.g. work bonus, inheritance, or refinance) and stable income, a balloon loan might suit short-term affordability goals. Otherwise, a conventional P&I mortgage or interest-only loan might be safer.

Since balloon mortgages are complex, you could seek a mortgage broker or financial advice. 

If you’re interested, we can help find the ideal balloon payment mortgage for you. We’ll:

• Run “what-if” scenarios to project your repayments and final lump.

• Compare this structure to standard loans for you.

• Curate suitable mortgage options from 30+ top lenders and 2,000+ mortgages in Australia.

This means we’ll take into account your best interest, giving you an unbiased, A-Z mortgage solution.

Contact us today. It’s all FREE, at zero extra cost to you!

The information in this article is general in nature and does not take your objectives, financial situation, or needs into account. Consider obtaining independent legal, financial, or credit advice before acting.

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