Interest-only home loans

24 August 2020

Interest-only home loans

If you’re looking for a home or investment property loan, interest-only loans are one of your two major options – the other is a principal and interest (P & I) loan.

What is an interest-only home loan?

An interest-only loan requires you to only make interest payments for a set period (usually up to five years). There is no reduction in the total amount you borrow (your principal) during that time.

At the end of your interest-only period, your loan typically reverts to a P & I loan until you repay the full amount you borrow over a much longer period (usually 25 years).

What are the advantages and disadvantages of interest-only home loans?

The pros:

  • Interest-only home loan repayments are lower than P & I repayments for loans of the same amount. That’s because you’re only paying interest, not principal and interest.
  • This home loan option provides you with a higher tax deductions if you’re borrowing for an investment property. That’s because the amount you borrow doesn’t reduce like it does on a P & I loan.
  • You can use interest-only loans for short-term purposes like bridging or construction loans. A bridging loan helps you to buy a new property while you’re waiting for funds from the sale of your existing property. A construction loan finances the building of a new home. Once building is completed, the interest-only loan reverts to a P & I loan.

The cons:

  • You’ll pay more overall on an interest-only loan that converts to a P & I loan. That’s because your principal isn’t being reduced during the interest-only period, so you’re being charged more interest.
  • Your repayments will increase significantly at the end of your interest-only period. You’ll need to be able to afford these higher repayments.
  • You won’t build any equity (ownership) in your interest-only period with your repayments like you would with a P & I loan. You’ll only build equity if the value of your property increases.

The bottom line

Whether this type of loan is appropriate for you depends on your individual circumstances.

What is a comparison interest rate?

Two interest rates are usually advertised on any loan product in Australia: nominal and comparison. The comparison rate is the higher of the two and includes the cost of interest plus all associated fees/charges. Lenders are legally required to provide you with the comparison rate before you take out a loan under Australia’s National Credit Code.

How we can help

At Wisebuy Investment Group in Newcastle, our experienced and licensed brokers can help you to find the right loan for your needs, including interest-only home loans. We can also help you with your application.

Contact us today for an obligation-free chat! We’ll take the time to understand your individual needs before providing you with appropriate advice. Our focus will be on finding the right loan for your needs from over 60 Australian lenders.

And best of all, our service is free!