Interest-only loans explained

Popularity of interest-only home loans appears to be increasing among both investors and owner occupiers. Structured much like any other mortgage, the main difference with interest-only loans is that borrowers repay only the interest instead of paying back both the interest and principal loan amount. This interest-only repayment pattern is normally for a set period of time, usually five to 10 years.

Typically, interest-only loans are a strategy by investors to help them juggle their property portfolio, however many borrowers are now using this type of loan for their own homes.

As a Loan Market broker I can work with you to determine which type of loan is suited to your needs and guide you every step of the way. Below are the ins and outs of interest-only loans, for both investors and owner occupiers. If you have any further questions, please get in touch.

Investors
You can increase and manage your cash flow more effectively by minimising monthly mortgage repayments. You can also claim tax deductions on your monthly interest payment.

Easiest way to quickly build wealth through property and keep expenses down whilst managing your portfolio.

Beware of relying too much on the value of your property increasing, whilst only paying back just interest. Without a capital gain at the time you decide to sell, you may find it hard to meet your obligations on the full principal loan amount.

Owner occupiers
By increasing the flexibility of your monthly repayments you can ease the strain on your finances, particularly if you know you have some heavy expenses.

Should be used as a short term solution to meet your immediate commitments or at a time when you need maximum cash flow.

Beware of your limits. Don’t take on a loan if you have no hope of paying back both principal and interest amounts, especially when interest rates rise or your interest-only term ends. Also be mindful that by not paying back any of the overall mortgage, you aren’t building and equity in your home.