Interest Only Home Loans
As the name suggests, an interest only home loan requires a borrower to repay just the loan’s interest and not the principal loan amount. The interest repayment can either be fixed or variable and it is only offered for a short period of time of one to five years. However, time will come that you will have to pay the principal loan amount.
Property investors go for this loan so that they can use their money for their other investments while paying the interest of other properties at the same time. This way, potential cash flow issues will be minimized.
No matter what the changes are in the interest rate of the interest only home loan. Its value is still lower than a loan that has a principal and interest amount. With this set-up, investors can pocket a large chunk of their income that can be used to upgrade their current property or purchase new ones.
The interest rate of an interest only home loan depends on whether it is a fixed or variable loan. This decision will depend on how market conditions shake up or whether you want a stable repayment amount.
Investors who own more than one property usually take a fixed rate interest only home loan so that they can delegate their finances very well. As a repercussion for the stable repayment, they will end up paying a higher rate if the cash rate decreases. On the other hand, the variable rate interest only loan depends on the movement of the official cash rate of the RBA but it has more useful features.
An interest only home loan has some risks involved. If market prices are on the downfall, it is possible that the value of the property will decrease from the original value. Therefore, its equity might not satisfy the repayments of the principal amount of the loan.
Therefore, you have to be keen in buying a property with an increasing value to cover future loan expenses. By the end of the interest only home loan term, the entire loan value is paid and the deal goes back to a principal loan with interest.
With an interest only home loan, investors can avail huge tax cuts due to negative gearing. It also gives them the chance to invest on more properties despite limited funds. The stable repayment can help you budget your money better and the low repayment lets investors keep more of their profit.
To lessen the problems that an interest only home loan may bring, you must not get a deal with monthly repayments. You must use your excess income and you can reduce the loan interest if you will have your income paid to your loan account or place tax refunds into your loan account for redraw.
