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Interest Only Home Loans
Interest only home loans may offer short-term savings that free up cash to cover other expenses or investments, but shouldn’t be viewed as a long-term solution.
If you’re considering an interest only home loan but want to know more about it, here’s a quick rundown of how they work, who they work for, and the pros and cons.
What are interest only home loans?
With an interest only home loan, you pay back only the interest charges on your loan for a set period of time, rather than paying back both the interest and principal.
The interest only period differs between lenders, but five years is typically the maximum term.
Interest only home loans initially provide short-term savings through lower monthly repayments. However, as you’re charged interest on the principal of your home loan, and you’re not reducing the principal during the interest only period, bear in mind that you’d be paying back more money over the life of the loan.
Who do interest only home loans suit?
Interest only home loans have traditionally been popular among property investors who intend to sell up after a market cycle – typically seven to 10 years. They then pay off the balance of the loan and pocket any capital gains the house has made as profit.
As another example, if you’re building or doing major renovations and need somewhere else to live in the meantime, an interest only loan may make it easier for you to cover both your rent and your mortgage repayments. Just remember, interest only loans are not a long-term solution.
What are the pros and cons?
As mentioned, short-term savings are the most obvious benefit of interest only home loans. Also, if you do come into some extra cash, many lenders will allow you to make additional contributions during the interest only period.
However, in the cons column is the fact that the interest rates on this type of loan may rise if the Reserve Bank of Australia (RBA) increases the official cash rate, or your lender chooses to increase their interest rate independently of the RBA.
Find out the total interest payable on your loan with iSelect’s Home Loan Calculator.
iSelect is not currently offering a Home Loan comparison