Is an Interest-Only Home Loan Right For Me?
When you’re shopping for the right home loan, you may notice the option to choose between interest-only repayments for a set period or start with principal and interest repayments from the onset.
While the loan repayments based on interest-only, are lower and may be an attractive option, it does not suit every home buyer. Which is why it’s important to first consider the pros and cons, what you would like to achieve, and even speak to one of our lending specialists if needed, to answer questions you may have, before you decide.
After all, you want to be confident that whatever your choice, you’re doing the right thing for your finances.
So how do you know if an interest-only loan is the right option?
This type of loan can be useful for property investors who can claim the interest as a tax deduction. An investor might go with an interest-only mortgage, counting on the gradual rise in property prices over time to work in their favour, enabling them to repay the principal at the end of the term.
First home buyers who want to ease into their mortgage and make their repayments for the initial few years more affordable may also be tempted to consider this option. Because you are paying only the interest part of your home loan, your monthly payment will be comparatively lower.
However, interest-only home loans are not designed for every type of borrower. Generally speaking, interest-only home loans may not be suitable for home buyers who want to be able to reduce their loan sooner. The less principal (the loan amount) you pay back, the more it will cost you in interest over the term of your loan.
Interest-only home loans can have some short-term benefits such as lower monthly repayments, potential tax benefits for investors and may free up cash to invest elsewhere. But carefully look at how the advantages stack up against the disadvantages.
The property value may drop
In case the price of your property falls due to market fluctuations, you risk owing more on the property than it’s worth because you’re not repaying the principal. You may end up having to sell your property for a loss.
Missed opportunity with low-interest rates
While the interest rates are low, paying part of both the loan amount you’ve borrowed, the principal, as well as the interest, could put you at an advantage. That way, if rates rise in the future, you will be paying those higher rates on a reduced loan amount.
Are you putting your cash to good use?
Making lower interest-only repayments also frees up your cash for other purposes, which can be handy. But if you’re just spending this extra money on trivial daily expenses instead of paying down other debt or investments, you could be wasting your funds.
It’s also important to note that you will need to pay off the amount you’ve borrowed, eventually. Unless you have a good reason for choosing an interest-only loan, it’s best to speak with an experienced lending specialist to assess your needs and financial circumstances to get the best deal.
At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.
But don’t worry, we can help with that.
If you’re thinking of buying a home, you can contact us for information about the best options for you when it comes to your mortgage.