Interest Only Home Loans…Yes Or No?
We’ve had an interesting start to the new financial year with a federal election giving people lots to talk about and no change to the official cash interest rate by the Reserve Bank of Australia.
In finance land, we’ve assisted an increasing number of borrowers in moving away from interest only home loans and refinancing to a more competitive rate, where they are making repayments to both the principal and interest components and saving thousands over the med-long term.
When we asked our borrowers why they chose an interest only loan in the first place, the general response is somewhat concerning - many have said to keep their repayments lower (as that was all they could afford), whilst others commonly say it was at the suggestion of the introducer (their bank and even some brokers!)
The decision to go either interest only or principal and interest (P&I) is totally up to the borrower. However, the borrower needs to understand that firstly in today’s market, interest only loans incur a slightly higher interest rate in many cases whilst the best deals are done on principal and interest repayments.
One borrower said they had no idea why the introducer made the loan interest only, so it was a very harsh reality when we explained that after three years of making repayments, the client still had the exact same amount of loan balance as they started with, so had actually made no progress with paying off the home loan. They were still where they started in terms of debt level!
Another had a very large sum of funds sitting in an offset account (which is a good thing) and making interest only repayments for nearly five years (not so good)- then wanted to know why their loan balance hadn’t come down at all!
Interest only means exactly that - interest only. On an owner occupied home loan, it’s pointless as the interest doesn’t qualify for any tax concessions, so why keep adding to the lender’s already huge profits? If your decision to go interest only on an owner occupied home loan is to keep the monthly repayments down then you shouldn’t be taking the loan to start with or should be looking at a smaller loan and paying off both P&I, as you are potentially setting yourself up to fall into financial hardship when interest rates rise (and they will eventually). Your home loan should be getting smaller whilst your home slowly increases in value, eventually, the home loan will be paid off.
We can clarify any further questions related to P&I loans applicable to your own situation or look at getting you a better home loan deal. Just give me a call on 0438 041 111 for a confidential discussion about how much money we may be able to save on your home loan.
As always, enjoy life, work hard, play safe and remember that we are always here to help you
‘Take the Confusion Out of Lending’
Peter Vinci - 0438 041 111