There are a number of reasons why an interest-only loan could be right for you. It is a loan feature that serves a specific purpose for your specific circumstances and financial situation. Here are some of the pros and cons of interest-only loans.
How interest-only home loans work
On an interest-only home loan (mortgage), your repayments only cover interest on the amount borrowed (the principal). For a set period (for example, five years), you pay nothing off the amount borrowed, so it doesn’t reduce.
At the end of the interest-only period, the loan will change to a ‘principal and interest’ loan. You’ll start repaying the amount borrowed, as well as interest on that amount. That means higher repayments.
Pros and cons of an interest-only loan
Pros
- Lower repayments during the interest-only period could help you save more or pay off other more expensive debts.
- May be useful for short-term loans, such as bridging finance or a construction loan.
- If you’re an investor, you could prioritize paying down any non-deductible debt first, and claim higher tax deductions from an investment property.
- Depending on your situation, lenders can allow you to extend your interest-only period.
Cons
- The interest rate could be higher than on a principal and interest loan. So you pay more over the life of the loan.
- You pay nothing off the principal during the interest-only period, so the amount borrowed doesn’t reduce.
- Your repayments will increase after the interest-only period, which may not be affordable.
- If your property doesn’t increase in value during the interest-only period, you won’t build up any equity. This can put you at risk if there’s a market downturn, or your circumstances change and you want to sell.
Talk to us
If you think an interest-loan might be what you’re after, talk to us to discuss your options.
*Source: https://moneysmart.gov.au/