Interest only home loans are a type of loan that can allow for increased cash flow and flexibility, which can be a big drawcard if you are renovating, building your own home or buying an investment property. But they may not be the best option for every type of borrower, so it’s important to know exactly what you are getting into before considering an interest only loan. Read on for Choice Home Loans’ guide to the basics on going interest-only.
What is an interest only loan?
As the name suggests, under an interest only home loan, a borrower only makes repayments on the interest accrued, not the principal amount borrowed. Usually short term in nature, the maximum term of an interest only home loan varies across lenders but is typically available for a maximum term of seven years.
What are the advantages of an interest only loan?
The fact that you are only repaying the interest on the loan means your monthly repayments will be significantly lower compared to a principal and interest loan. Many borrowers find this type of loan useful if they are in a situation where their cash flow is temporarily tight - for instance, if they are building or renovating a home and having to rent an additional property in the meantime.
Interest only loans are also useful for those who are thinking of buying an investment property. The lower up-front costs associated with interest only loans allows you to purchase an investment property without the financial pressure of making principal and interest repayments on it.
Provided the market rises and they earn a good profit on the sale of their investment property.
What are the disadvantages?
The main risk with this type of loan is the time restriction. For investment buyers, if the market has not grown strongly enough at the end of the loan term you may be forced to sell your property at a loss to pay back your home loan and find alternative funds to repay the loan. For regular borrowers, the danger is that you will get used to the lower repayments and be hit with a major shock when your interest-only term ends and you must also start to pay back the principal.
For this reason, it is best to think carefully about getting an interest only loan. If you are not yet able to afford full repayments on the property you want to buy, you may want to think about saving a little longer for a deposit or downgrading your price range.
If you’re thinking about buying a property and want to look into an interest only loan, Choice Home Loans can help. Our experienced brokers work with dozens of different lenders across the market and can help you compare and select the loan that best suits your needs.
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