You might choose this loan type of you’re a property investor who wants to claim your interest as a tax deduction. You can also use interest-only home loans to access more control over the rate at which you pay off your loan. If you end up with extra income one month, there’s nothing to stop you from asking to pay extra off your loan during that time.
The Benefits of an Interest-Only Home Loan
For people who want more control over their home loan repayments, interest-only loans offer a range of benefits, including:
Lower monthly repayments: If you don’t have a lot of cash right now, you can keep your monthly repayments as low as possible by only paying the interest. For instance, if you were paying off a $300,000 mortgage over 25 years with a 5% interest rate, your monthly repayment would usually be about $1,754 a month. However, with interest only, the price would go down to $1,250 per month.
Maximise tax deductions: Interest-only home loans generally present a range of potential tax benefits to investors. You can claim the interest on your loans and reduce your tax fees each year.
Free up cash for other investments: Since you’ll have more cash left over at the end of each month, you’ll also have money to invest however you choose. You may decide to save up cash to make large lump-sum payments into your home loan. Alternatively, you may choose to invest your cash elsewhere and build your long-term wealth.
Should You Get an Interest-Only Home Loan
Interest-only home loans have a lot of benefits to offer, but they won’t be the right option for everyone.
Reasons for Interest Only
- If you get extra money in that month, you can pay down the principal faster.
- Reduces your risk of cashflow issues if your income varies or fluctuates
- There may be positive tax implications.
- In good housing markets, your equity can still rise if the increase in value of the house exceeds the interest rate per annum.
Arguments against Interest Only
- Some people aren’t disciplined enough to pay above the minimum repayments, and this product could trap those people into a loan that lasts a lifetime. (Make sure you don’t fall into this trap.)
- These loans often expire after a few years and will require refinancing.
If you decide to use an interest-only home loan to limit the amount you pay each month, then its worth remembering that you’ll need to pay your loan off at some point — as the minimum repayments will make no impact to the principal.