An Interest Only home loan enables you to pay only the interest on the amount you borrowed for your property for a set period of time. Usually, you can pay interest only for the first one to five years of the home loan although some lenders do offer longer terms. At the end of the interest-only period, you will then have to start paying off both the principal and the interest of the loan.
At this point you will have four options:
- Continue repaying the principal and interest repayments.
- Refinance your home loan with another lender.
- Pay off the outstanding balance of the loan.
- Depending on your lender, set up a further period of interest-only repayments.
Interest Only Home Loan Advantages
- Get lower minimum repayments during the interest only period. This can be a real help if you are on a tight budget or you need to save for renovations/improvements.
- Assuming it is not a fixed rate interest only home loan, you'll have the flexibility to pay off, and often redraw, the principal at your own convenience.
Interest Only Home Loan Disadvantages
- Many lenders now charge higher interest rates on interest only home loans compared to principal & interest home loans.
- At the end of the interest only period - the switch to P&I can become a financial burden if you haven't budgeted accordingly for the switch.
- Interest rates on interest only loans typically can’t be fixed, so if rates rise, your minimum repayments will increase.
- If property prices fall you may end up with Negative Equity. Negative Equity occurs when the value of a property used to secure a loan becomes less than the outstanding amount (principal) on the loan i.e. if you need to sell under these conditions, then you may well have to sell the property at a loss.
Most Suitable For
- Investors who can claim the interest payments as a tax deduction and who plan to pay off the principal when the property is sold, having banked on achieving capital growth.
- Can be good for first home buyers, as the reduced repayments can enable you to get on the housing ladder earlier.
Want to talk more about your home loan options?
If yes, then please get in touch with me today and I'll be happy to help. All my home loan and mortgage services (from the initial meeting, right through to home loan settlement) are completely free to you.