Four things to consider before taking out an interest-only loan
Tue Oct 11 10:30:00 AEDT 2016
If you want to get into the property market but you’re worried about your cash flow being enough to repay a loan, you could consider looking into an interest-only loan. There are pros and cons to doing this, so make sure you know and understand them before diving in.
Here are four things you should consider if you plan on taking out an interest-only loan.
1. Lower monthly repayments during interest only term
Many lenders offer interest-only home loans for a set period of the repayment term, meaning during that period you’ll only repay the interest on your home loan, rather than the principal amount plus the interest. This means your initial monthly repayments are significantly reduced during the interest only term.
This frees up cash in the short term to use for other purchases, such as paying off bills, refurbishments or other investments. Freeing up cash now however will increase your loan repayments after the interest-only term.
2. The rise and fall of the property market
If you’re thinking of buying an investment property, taking out an interest-only loan could be an option for you. You could make smaller repayments, rent out your property to make up the monthly loan repayment difference, and (hopefully) make a profit once you sell the property and pay back the loan in full.
Investment properties are not without risk, particularly if your property doesn’t increase in value. Make sure you assess the risks of purchasing an investment property, seek out independent tax advice and avoid getting into financial difficulties that might result from buying at the peak of the property market, entering into an interest only term and selling at a loss.
3. You still need to pay off your debt
While repaying just the interest on a mortgage might be cheaper for now, you’ll still need to repay the entire loan amount eventually. If you’re planning on holding on to the property for a long time, the short-term benefit of smaller repayments for a few years might not be worth it over the life of the loan. Smaller payments now will see the repayments increase when the interest-only period ends.
4. You pay more in the long run
With an interest-only loan, you may end up paying back more on the home loan over the life of your loan. This is because your interest is still accruing based on how much you have left of your principal loan to pay out. For this reason, interest-only loans should only be considered as a short-term solution. An interest-only loan can cost you tens of thousands of dollars more in extra repayments than an ordinary home loan. You can compare the interest only loan to a regular loan using a Choice Home Loans interest calculator.
Get the right advice
If you’re interested in understanding and looking into interest-only home loan options, Choice Home Loans can help. Our knowledgeable brokers are experienced with all types of home loans, and can help you choose a product that may fit your financial circumstances.
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This article is written to provide a summary and general overview of the subject matter covered for your information only. Every effort has been made to ensure the information in the articles is current, accurate and reliable. This article has been prepared without taking into account your objectives, personal circumstances, financial situation or needs. You should consider whether it is appropriate for your circumstances. You should seek your own independent legal, financial and taxation advice before acting or relying on any of the content contained in the articles and review any relevant Product Disclosure Statement (PDS), Terms and Conditions (T&C) or Financial Services Guide (FSG).