When you start to research investment loan rates for a second property or another addition to your portfolio, you may be able to choose from a range of investment mortgage products. As well as the standard fixed, variable or split rates, you could search for the best interest only investment loans for your needs.
What is an interest only investment loan?
When people take out a mortgage, they typically pay back a small part of the principal amount owing, plus an interest charge, with each repayment. The idea is that this gradually reduces the principal sum owning over time, so at the end of the mortgage term, you’ll have paid off everything you owe and own the property outright.
With an interest only investment home loan, your repayments just pay the interest charges on your loan, without reducing the principal sum. This gives you the opportunity to manage your cash flow by making smaller monthly repayments than for a standard home loan. These interest-only payments may also be easier to track for tax purposes, and the smaller repayments may also help to maximise your rental yield from the investment property.
Depending on your lender, you may be able to get a flexible repayment schedule so that you can have greater control over cash flow. For example, when you can afford to, you may have the option to make some extra repayments to go towards reducing your loan principal.
Keep in mind that the cheapest interest only investment loan may not always be the best choice for your needs. Consider comparing interest rates, fees, features and other benefits before making a final decision.
What are the risks of an interest only investment loan?
Like other home loans, interest only investment mortgages come with the risk that you may no longer be able to afford your repayments if your personal circumstances changes (such as if you lose your job), or if interest rates rise. While interest only loans typically have lower repayments than principal and interest loans, which could offer you some extra flexibility, there is still a risk of financial stress depending on your household budget.
One significant risk of interest only investment loans comes from the fact that the interest-only period only lasts for a limited time, often up to five years. During this time, you aren’t reducing the principal owing on your mortgage, and you aren’t building your equity in the property. Once the interest-only period expires, you may experience bill shock when you revert to principal and interest repayments, as these repayments may be significantly higher than what you were previously paying.
Some investors use interest-only loans with the goal of minimising their repayments, while they wait for the property to appreciate in value, allowing them to benefit from the capital gains. However, there’s always a risk that a property’s value may plateau or even fall, which could leave an investor in a challenging financial position.
Consider seeking advice from a mortgage broker, accountant, or financial adviser before making a property investment.
How do interest only investment loan rates compare with other products?
Lenders often charge higher interest rates for investors than for owner occupiers, and for interest-only loans than for principal and interest loans. This is because owner occupiers paying principal and interest are seen as less risky borrowers, as they are motivated to keep up with their repayments to keep a roof over their head. Investors paying interest only may be seen as riskier borrowers that are more likely to default.
It's important to always do your research to find the best interest rate and conditions for your household budget and financial goals. Comparing interest only investment loan rates can help you get a better idea of which options may be best suited to your needs.
