What is an interest-only home loan?

Interest-only mortgages require the borrower to repay only the interest on the loan. The original loan amount – the principal – is not repaid until the loan ends. For example, a $100,000 interest-only home loan charging 5 per cent p.a. in interest would require $5,000 to be repaid each year. The loan’s outstanding balance would remain at $100,000.00.

What are the benefits of an interest-only home loan?

Interest-only mortgages require much lower repayments than traditional ‘principal and interest’ home loans. That is because the borrower is not repaying any of the principal loan amount. Interest-only home loans are usually repaid and terminated when the property is sold or the borrower refinances to another loan. Interest-only home loans are particularly popular with property investors who want to rely on capital gain to make a profit.

How do property investors profit from interest-only loans?

Interest-only home loans are popular with investors. One common strategy for investors is to take out an interest only mortgage with repayments set lower than the income (rent) generated by the property. The investor plans for the income to cover expenses, including the loan repayments. The investor is also hoping that the capital value of the property will rise. In a few years, the investor sells the property for more than they paid to buy the property, they repay the entire loan and pocket the difference.

What is the downside of interest-only home loans?

People who take out an interest-only home loan usually require a much larger deposit than borrowers who take out a principal and interest home loan. That is because lenders recognise there are additional risks with an interest-only mortgage.

The biggest risk is that the value of the mortgaged property could fall. While many borrowers discount this possibility, falling property prices are a real possibility in any market. If the property declines in value, the borrower could be left owing more than the property is worth. If the borrower needs to sell or can’t make repayments, this becomes a real problem. Interest-only borrowers are betting on rising property prices.

How can I get an interest-only home loan?

All the major Australian home loan lenders are listed and compared at Infochoice. Find a great deal and check out the information contained on each loan's information page.

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