Interest Only Home Loans
23 Jan 2023
Interest-only home loans have become increasingly popular in Australia in recent years, but is this type of loan right for you? In this blog post, we will explore the pros and cons of interest-only home loans to help you make an informed decision.
Pros:
- Lower Repayments: Interest-only home loans have lower repayments than principal and interest loans. This can make it easier to afford a home and free up cash flow for other expenses.
- Flexibility: Interest-only home loans offer more flexibility than principal and interest loans. Borrowers can choose to make interest-only payments for a certain period, after which they can switch to principal and interest payments.
- Investment Potential: Interest-only home loans can be a good option for property investors who plan to use rental income to cover their mortgage repayments.
Cons:
- Higher Interest Rates: Interest-only home loans typically have higher interest rates than principal and interest loans. This means that borrowers will pay more in interest over the life of the loan.
- Risk of Negative Equity: Interest-only home loans can lead to negative equity if property prices fall and the borrower’s mortgage balance is higher than the value of the property.
- No Equity Built: With interest-only loans, borrowers don’t build any equity in their property as they are not paying off any of the principal.
- Repayment shock: As the interest-only period ends, the borrower will have to start paying off the principal as well as the interest, which can lead to a significant increase in repayments.
- Limited Lender’s Option: Interest-only loans may be harder to find, and some lenders will not offer them at all.
In conclusion, Interest-only home loans can be a good option for some borrowers, but it’s important to consider the pros and cons carefully before making a decision. It’s also important to consult a financial advisor to understand the long-term implications of this type of loan and to ensure it is a suitable option for you.
