Save a tonne: Choose the right loan
Sit down, take a deep breath, things are about to get easier. We’re here to rescue you from endless Google searches trying to determine what type of loan is right for you. Choosing a loan can be complex, time-consuming and let’s face it - confusing, but ensuring you’ve got the right loan for your needs could save you a tonne.
An interest-only loan is just that, interest only. With one of these bad boys your repayments only cover the interest on your loan.
- Lower repayments: That’s right, if you’re just paying off the interest on your loan then you will have a lower repayment amount. If you want to maximise what you can borrow or you need that spare cash for something else then interest-only could be just thing for you.
- Tax deductions: There are two certainties in life; death and people trying to pay less tax ;) An interest-only loan could help you do just that. Savvy property investors often choose an interest-only loan to smooth cash flow and potentially reduce the amount of tax they pay.
- Short-term borrowing: If you only need a loan for a short period, like renovating, building your dream home or moving between homes, then an interest-only loan with its initial period of lower repayments may be just what you need.
Ok, that all sounds pretty great...but you can’t have roses without thorns so let’s talk about the downsides.
- Higher interest rates:Interest rates on interest-only loans are often higher. Plus, you will end up paying more interest over the lifetime of your loan. Look at it this way, if you borrow $500,000 over 25 years at 4.2% interest and for the first five years you only pay the interest at the end of that time you’ve got 20 years to pay back the original $500,000 and you’re paying $36,471 more in interest over the course of your loan.*
- Equity: If you’re not paying back your principal loan amount then you’re not building equity in your home. If your home doesn’t increase in value in the interest-only period then in spite of making payments every month by the end of the interest-only period you won’t have any equity in your home.
- Repayments: Interest-only loans tend to be offered on a fixed term basis e.g. a period of five years. After that, you’ll start paying interest plus the principal loan amount aka what you borrowed. If you’re looking at an interest-only loan because you can’t afford the repayments on an interest plus principal loan ask yourself; what will be different at the end of your interest-only period? Will you be able to afford the repayments then?
Principal and interest loans
If an interest only loan isn’t your cup of tea then you’re going to want to look at the principal and interest loan option. With this loan, you’ll be paying off both the interest on your loan and your actual loan amount when you make your repayments.
- Less interest: Paying your principal loan off straight away means you’ll pay less interest over the lifetime of your loan. Less interest paid over term of the loan to the bank means more money for you and we think you deserve your money more. Yep, we said it.
- Lower interest rate: Lenders generally offer lower interest rates for loans where you’ll be paying the principal plus the interest.
- Equity: The more you’ve got the better off you are and paying off your principal loan means you’ll build equity faster than you would on an interest-only loan. Bonus, once you’ve got that equity you can refinance# to access your home equity and maybe consider investing in areas like property, shares, or managed funds.^
- Higher repayments: if you’re struggling to make repayment then the higher repayments on principal plus interest loans might prove one hurdle too many. For investors higher repayments also means less cash to utilise elsewhere.
What’s right for you?
Excellent question. Now, you could comb through the myriad of websites out there, decipher the home loan offers and choose the best one for you, or you could call a mortgage broker who will do the hard work for you. Bonus, our service to you is free, but keep in mind other fees and charges may apply.
*Based on a $500,000 loan over 25 years at 4.2% interest with a five year interest-only period.
#Consolidation/Refinancing is subject to various lender imposed terms and conditions including but not limited to loan serviceability, valuations and confirmed capacity to service both any existing and revised lending arrangements.
As with any financial scenario there are risks involved. This information provides an overview or summary only and it should not be considered a comprehensive analysis. You should before acting in reliance upon this information seek independent professional lending,taxation or investment advice as appropriate specific to your objectives, financial circumstances or needs.