02 Feb 2022

What Are the Disadvantages of an Interest-Only Mortgage?

Interest-Only Mortgag

The economic uncertainty in Australia from 2007 to 2008 brought changes to the mortgage lending sector. Professionals in the industry realised that many Australians no longer fit the conventional home loan profile. They needed mortgages with different parameters. Among the new home loan options is the interest-only mortgage.

It keeps the initial repayments low. This bodes well for homebuyers whose finances remain tight during the process. Investors also benefit from this option. This home loan provides lower monthly repayments for the first five to 10 years. However, this leads to two disadvantages.

Once the interest-only period ends, the monthly repayments jump. They jump up to $500. For some homeowners, the jump is a shock. The other disadvantage is that homeowners don’t build equity during the interest-only period. All repayments cover the interest that the home loan accrues during these years. None of it goes toward the principal. Thus, homeowners don’t chip away at the loan.

It’s always worthwhile to see the positives of non-conventional home loans. In some cases, an interest-only mortgage becomes the only financing that helps individuals become a homeowner. Otherwise, they remain renters longer. Before the interest-only period expires, homeowners can speak with their lenders. It’s possible to refinance a home loan. This allows a homeowner to obtain more favourable loan terms. 

Interest-Only Mortgage Conclusion

An interest-only mortgage benefits homebuyers who seek to keep their overhead costs low the first few years of homeownership. The home loan also benefits investors. To further discuss the mortgage option, contact our Mortgage House loan specialists.

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