Interest Only Home LoansHome Loans for people looking for the flexibility of an interest only loan — where your payments only need to cover the interest.
What is an Interest Only Home Loan?If you've been looking into your home loan opportunities lately, you might have noticed a range of ways to access the cash you need for a new property. One particularly compelling type of home loan product for some borrowers is the "Interest Only" home loan. An interest-only home loan essentially does what it says on the tin. Rather than agreeing to pay a certain amount of your loan principal, and a portion of interest every month, you only need to pay the interest on your loan -- and can pay down the loan as you choose. So, what do you need to know if you're thinking of using this kind of capital? With an interest-only home loan, you enter a loan term with a provider that usually lasts no longer than five years. At first, these kinds of loans were explicitly introduced for borrowers who needed help to pay fewer monthly fees. After all, if you only need to pay interest, your bills won't be as big. However, there are other people that can benefit from interest-only home loans too.
Some Interest Only Loans on the Market:
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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.