Interest only home loans lower repayments to suit investors
Interest only home loans are popular among property investors because they allow the investor to make lower monthly repayments on the home loan. This is because unlike other home loans, repayments are made on the interest portion of the loan only. Here we take a look at interest only home loans.
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What is an interest only home loan?
With a normal interest and principal home mortgage, your monthly repayments are used to reduce both the total interest you owe on your home loan as well as the principal amount (the actual amount you borrow). With an interest only home loan mortgage however, the monthly repayments reduce the interest payable on the loan only. The principal amount of an interest only home loan remains the same as when the loan was originally taken out. So, if you borrow $300,000, you will still owe this amount at the end of the loan term.
The advantage of an interest only home loan over a principal and interest home loan is that the monthly repayments are much lower. This lower monthly repayment makes the interest only home loan particularly popular among property investors in Australia..
See just how much lower the repayments are on an interest only home loan by trying the interest only home loan calculator on our home loan resources page.
The term of an interest only home loan
Interest only home loans are usually taken over a much shorter term than a principal and interest home loan. For the borrower, this shorter term reduces the total amount of interest payable on the home loan. Typically, the term of an interest only home loan will be between two and five years. At the end of this term, the full principal amount will be due to be repaid. For property investors, interest only home loans offer the opportunity to make a short term investment in a property for a relatively low monthly repayment.
Are interest only loans suitable for owner occupiers?
Because you are only repaying the interest, interest only home loans are generally more suitable for a business or for property investors than they are for owner occupiers. While this may usually be the case however, owner occupiers may benefit in some circumstances. Interest only home loans are most beneficial where the property will be sold within a shorter period, usually within five years, for a profit. One of the risks of interest only home loans is where the value of the property falls or does not rise sufficiently in value due to a downturn or drop in the property market. This is because the full principal amount of the interest only home loan must be repaid.