How do interest-only loans work?
Interest only mortgages are exactly what they sound like they should be. Instead of paying back the interest and the principal amount, the aim is to only pay the interest of a loan. These loans are a great way to get into the property market, especially as an investor. They can also be beneficial if you need cash flow for your investment, or are interested in buying shares. The theory is the increase in the value of your property or your share portfolio, over time, will cover the principal part of your loan. These kinds of mortgages can be attractive, but come with an element of risk, especially if property prices, or the share market, drops. Interest only mortgages usually have lower payments, and if you already have a sum of money, then this can help free it up for other things. And these kinds of mortgages are usually only available for up to 10 years, after which it will revert to principal and interest, but can be extended on application.
Are interest payments treated the same as normal loans?
If successful, an interest only loan will allow you to invest in a property, only pay the interest on the loan and then sell the property to cover the principal, and make a profit. However, if you hang on to your interest only loan for a while longer, there are a few things to remember when it comes to repayments. Once the payments hit the end of their interest only period, there can be a substantial increase in the amount. This is because the principal part of the loan will kick in. It is important to make sure you have budgeted for this increase. It’s also important when talking about interest payments to recognise that as none of the initial payments are applied to the loan principal amount, you will not be increasing you’re the equity in your home.
What else should I look out for when it comes to repayments?
You can choose either variable or fixed interest only mortgages, and even split your loan between the two, based on your own financial situation. However, it is important to be careful when you are considering these mortgages. While the repayments can be tax deductible if you are using the loan for an investment, interest only mortgages are mostly a short-term benefit. And they can require a lot of discipline because it is important to realise that in the medium term the repayments are going to increase substantially. That discipline is either in ensuring you have the money available when it is needed, or being prepared to sell the property before any principal payments become due , no matter the state of the property market.
How do I deal with rate hikes?
Like everyone who has a variable interest rate loan, having an interest only loan means your repayments can be influenced by any interest rate changes. Variable rates are influenced by the official interest rate is set by the Reserve Bank. This rate is the overnight rate the Reserve charges lenders to borrow. Banks and lenders usually respond if this interest rate changes, which means a change in the variable home loan rate rate. This is one way the Reserve Bank can slow down or speed up the Australian economy. The theory is if people spend more on their mortgages, they are spending less in other areas of the economy, and vice versa. The variable rate can also influence fixed rate offerings, and if your payments are based around interest rates, then clearly that can influence the size of your payments. If you are not an investor, but an owner-occupier, then interest only mortgages can be worrisome in a volatile interest rate environment. Theoretically, if you have an interest only loan, you have concerns about whether or not you can pay back a loan that is both principal and interest.
How do I compare the interest rates of interest-only loans?
At Mortgage House, we offer a range of interest only loans, with interest rates varying depending on the type of loan. Our mortgage calculator can help you compare the different kinds, and give you an overall picture of what might be best for you. Our experienced loan specialists can be on hand to answer any questions you have, and give you all the extra information you need. We want to find the best interest only loan to help you achieve your property dreams, and we will take you through everything you need to know. We will walk you through the different types of fees, and what they all mean. There may be either upfront or ongoing fees with certain loans, and we can help you reveal any hidden traps. We will also take you through the different interest rate options, and the features are of the loans you are comparing. There can be a few little tricks to interest only mortgages, such as offset accounts and making extra payments, all of which can make a big difference.