Interest Only Home Loan
An Interest Only Home Loan is different from a standard home loan in the manner that it is repaid. With conventional principal and interest home loans, the repayments include the interest and a minimal percentage of the principal. On the other hand, interest only home loans repay only the interest part of the loan for a certain period of time, normally up to five years. When you choose an interest only investment loan, the principal amount will not be reduced but you will lower the monthly repayment amount.
Who Can Apply for Interest Only Home Loan?
Interest only home loans are ideal for investors who need funding to buy investment properties then minimise their repayments. Property investors are using this strategy to deduct the maximum possible interest payments from taxes.
Owner-occupier borrowers can also use this type of home loan to maximise your cash flow while minimising your monthly mortgage repayments. However this is a short-term strategy at best, and principal and interest repayments are recommended for home owners to reduce the mortgage and build equity over time.
Interest Only Loans Pros and Cons
Common benefits of Interest Only Loans include:
- Flexibility to make additional repayments
- Tax advantages for ‘negative gearing’
- Lower monthly repayments
Common disadvantages of interest only loans can include:
- Higher interest rate charged by the lenders
- Credit approval more difficult
- Limited loan to vale (LVR) ratios
- Additional lender fees