Interest Only Loans

Borrowing to buy a property and repaying only the interest for a set period can be a great choice for some, because interest-only loans can offer the right candidate financial flexibility while they invest. There are, however, some very important risks to take into consideration.

With interest rates at historical lows, interest-only loans may sound more appealing than ever because they offer the opportunity to enter the property market with lower repayments. In saying that, care must be taken, as interest-only loan repayments do not pay down the actual purchase price of the property or reflect a realistic repayment on a standard mortgage.

If a borrower chooses to only make the minimum required repayment on an interest only loan they are not reducing the amount of money they owe to a lender. They have simply paid to have the money and as such, they do not reduce their liability. In some instances, a borrower may be able to make extra repayments on an interest only loan that will lower the principal amount, but this is dependent on the conditions of the loan with the bank and is not always possible.

The reasoning for only wanting to pay interest on the money borrowed differs for everyone but the reason should never be because they can only afford the interest only repayment. It is vital that a borrower can pay back a loan and its principal in due course as interest only terms are only for set periods of time. If the borrower is unable to make Principal and Interest repayments, the borrower should consider if this is the right decision for them as in the future. An inability to pay off a loan can cause great stress.

For many investors, interest only loans provide extra cashflow to allow them to pay off a home loan attached to their own privately occupied property, while maximising the tax benefits associated with investment properties and using an interest only facility. This is a highly effective strategy but planning needs to be thorough to ensure no undue stress is endured in the long term.

Interest only loans have a place in many financial strategies but it is important that they are well thought out and thoroughly planned for when the interest only term expires. An appointment with a qualified mortgage broker can discuss this with you and show how much repayments for both principal and interest loans and interest only loans are. It is important that an exit strategy is in place for any financial plans.