Experts warn on interest-only loans

Industry experts are advising property investors to switch to principal and interest (P&I) mortgages within a few years of taking out interest-only loans. P&I borrowers build up equity in properties while interest-only mortgagors do not. At current interest rates and assuming stagnant prices, the P&I borrower will have a 10 per cent stake in the property's value after five years of a 25-year loan while the interest-only borrower will have no equity.

The National Tax and Accountants Association says the tax benefits of interest-only loans are attractive but many people don't realise they can also pay extra interest, which can eliminate these benefits. Wizard Home Loans says P&I loans are always the better option for those who can afford them. Bluestone Mortgages advises against the interest-only option; the company offers these loans for a maximum of three years.
InfoChoice says the loans have been beneficial as stepping stones into the market but supports the warning. “Investors with interest-only loans are solely reliant on property appreciating in value, outside of tax benefits,” says spokesman Denis Orrock.