11 Dec 2021

Interest-Only Home Loan: The Risks

The lending market has created additional mortgages that open homeownership to more sectors of homebuyers. Several options benefit investors too. Interest-only home loans keep the repayments low for the first year to ten. 

Here we discuss the two interest-only home loan risks associated with this mortgage.

Interest-Only Portion Expires

The interest-only portion of this home loan expires. It lasts between one to ten years. This feature helps two sets of homebuyers. The ones struggling to obtain a mortgage and investors.

Investors seek to keep their overhead costs low. While they improve the property or find a tenant, the property produces no income. For a $300,000 at 3% interest over 30 years, the monthly repayment equals $1,265. For interest-only home loans, the monthly repayment equals $750.

The lender capitalises the entire loan amount including the home loan interest rates. In many cases, the borrower pays more than a borrower who opted for a traditional mortgage. 

For some homebuyers, an unconventional home loan is the only way to get their foot in the homeownership door. 

The Principal Remains the Same

While the investor or homebuyer pays interest-only toward their mortgage, the principal remains the same. This means that the interest rate charge doesn’t drop. When the interest-only period expires, the monthly repayments increase significantly. 

Interest-Only Home Loan Risks Conclusion

The interest-only home loan risks aren’t several. There are two, and they are major. The risks make it a solid option for investors. To discuss your options, contact Mortgage House. Our loan specialists can outline the details for homebuyers and investors. 

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