Why are interest only home loans so popular?
Interest only home loans are becoming more popular than ever before with owner-occupiers. Demand for interest-only home loans is now booming. The Reserve Bank of Australia reports that 24 per cent of owner-occupier mortgage borrowers have an interest only home loan.
This high level of demand for interest-only loans is despite interest rates now being set at a record low level. Many home loans have headline interest rates now below four per cent.
What is an interest only home loan?
An interest only home loan doesn’t require the borrower to make any repayments of the principal loan amount for fixed length of time, usually up to five years. You only make payments to cover the interest. This makes the repayments much lower.
And interest only home loan saves you cash (from lower repayments) in the short term but leaves you with a debt that remains the same size as at the beginning of the loan. In the long term the loan charges more interest because the debt remains larger for longer.
Interest only home loans are often used by investors who count on the property rising in value during the loan term and paying off the principal loan amount when the property is sold.
Is an interest only home loan right for me?
Australian Bankers Association CEO Steven Munchenberg said it’s important that borrowers have a plan to pay off their mortgage.
“The longer you take to repay your loan the longer in total interest that is charged said Mr Munchenberg.
When borrowers apply for their loan they are still assessed on whether they can afford principal and interest repayments. Applying for an interest only loan will not allow you to be approved for a larger loan.
Borrowers might choose an interest only loan because they are starting a family and need more cash flow for a limited number of years. Or they are doing renovations and want to invest in growing the value of their home.
Financial adviser Ryan Watson, told The New Daily that interest only home loans are not always a good idea for owner occupiers.
“If interest rates rise over the next two, three, or four years, then people might be left unable to afford those interest-only repayments.”
Some lenders charge a higher interest rate for interest-only home loans.
How to find a good interest only home loan
Most lenders offer interest only options on at least some of their mortgage products.