An interest only home loan is a loan where you only repay your bank the interest generated on the loan, not the amount you initially borrowed, known as the ‘principal’. Most lenders will only allow you be on an interest-only loan for a limited time, after which they’ll ask you to start paying back both the principal and interest and your repayments will become higher.
Should I take out an interest only loan if I’m an investor?
Interest only loans are particularly popular with investors who are looking for a property that will rise in value but that doesn’t require them to put too much of their own money into it. This is the major benefit of taking out an interest only mortgage as well as certain tax benefits that investors can gain from this style of loan. Of all investor loans around two thirds are interest only loans according to the Australian Securities and Investments Commission.
Should I take out an interest only loan if I’m an owner-occupier?
An interest only loan can also be used by home owners who need a break from paying the full amount of mortgage repayments or want to begin their loan by paying smaller repayments. Approximately one quarter of owner occupier loans are interest only. Even though there is no long-term benefit to this approach it is an option available to borrowers with this type of loan if needed.
Do keep in mind that when taking this approach, over the life of the mortgage, you will end up paying significantly more in interest. It is estimated that if you take out a $500,000 mortgage to be paid over 25 years, with a 10 year interest only period, at an interest rate of 4.5 per cent you will end up paying almost $80,000 more in interest than if you had a regular principal and interest loan.
Is an interest only loan right for me?
There are some important considerations to make when deciding if an interest only loan would be appropriate for you. It is essential to consider whether or not you will be able to make the higher repayment amounts after the interest only period of your loan has ended. It is also best to weigh up whether or not the short term benefits of having cheaper repayments will benefit you in the long run.