While standard home loans remain the most popular in Australia, interest only home loans are becoming increasingly sought after as household budgets groan under the weight of rising living costs and higher house prices.
Interest only home loans can be a great idea in certain circumstances but are generally not advisable if you're doing it to pay bills or you're taking on mortgage too big for your bank balance.
Here's how to make this type of loan work to your advantage:
As the name implies, interest only home loans are where you pay only the interest on your loan, which means your monthly repayments are less.
In the past, investment property buyers predominantly used these loans, but they're becoming increasingly attractive to those wishing to purchase a more expensive home, or who already have a large mortgage, as paying only the interest on a large mortgage will save you a lot more money. Also, if you're only planning on hanging on to your property for a few years before flipping it, this type of loan can be beneficial.
The obvious advantage of an interest only home loan is that it frees up money for other things.
Interest only loans can be particularly beneficial in the short-term. If you're financially savvy, you can take the extra savings from your reduced mortgage payments and invest the money into a something with a high return.
And, if you're building your own home or renovating, an interest only loan can be helpful. For instance, if you're renting while your home is being built, arranging an interest only loan for 12 months can make it easier for you to meet both your rental and home loan obligations.
If you work in a field, such as sales, where your income is likely to fluctuate each month, an interest only loan may also work for you.
However, while it puts extra cash in your pocket, this type of loan is not recommended as an emergency stopgap measure in the event you need to pay day to day living expenses such as groceries and bills.
The big downfall is that you're not really paying any money off your home and you're not building equity, which also means you can't borrow against it.
And, interest rates are usually higher than on standard fixed rate loans, and are generally not fixed, so if interest rates go up, so do your payments.
These loans are also not a long-term option and usually operate on a maximum five-year term so they can't be used over a full 25-year mortgage.
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