Interest-only home loans can be used by home owners for number of reasons. So what is an interest-only home loan? What are the possible benefits and pitfalls that may affect your finances?
Simply put, an interest only home loan is when borrowers only have to pay the interest as well as any fees for a fixed period of time, usually five to 10 years. During this period, the repayments are a lot lower compared to a principal and interest home loan. Once the interest-only period ends, the home loan will revert back to a principal and interest home loan over the remaining term. For example, if it was a 30 year loan initially and 10 years interest only has passed, the new principal and interest repayments will be calculated over 20 years which could be quite a large increase in repayments. This can often catch borrowers off guard if they forget that the interest only period is expiring.
It is common for investors to take out interest only loans on investment properties. This allows them to make minimum repayments on tax deductible debt, allowing them to direct more of their income to pay off the loan on their owner occupied property which is not tax deductible.
Interest-only home loans may also be a suitable option for first home buyers looking to get their foot in the property market sooner. An interest-only period can help ease first home buyers into repayments and then they will have time to get financially ready for the larger repayments when the interest-only period ends. Home owners could also go through periods where their household income is reduced, for example if one partner reverts to part time work when starting a family. Changing the home loan to interest only during this time could ease the financial pressures.
But just like most financial commitments, interest only home loans have both pros and cons attached. Listed below are just a few.
So what can you do to avoid some of the pitfalls?
If you have an interest only loan, many lenders will allow you to pay extra into the loan or have an offset account linked to the loan. Paying extra into the loan or into the offset account will get you used to higher repayments before it reverts to principal and interest. It can also help you build equity. Anything you pay above the minimum interest only amount will be available for you to redraw.
If you are an investor and want the loan to remain an interest only loan for longer, you can approach your current lender to extend the interest only period or refinance to another lender to start the interest only period again.
State Custodians has a range of interest only home loans. To find out if an interest only loan would be suitable for you, give our Lending Specialists a call on 13 72 62 or leave your details here to contact you.