Are you looking at exploring the possibility of an interest only home loan?
An interest only home loan gives you the freedom and flexibility to secure your dream property, while only having to pay the interest on the mortgage for a set initial time period. This period is typically somewhere between 1 to 5 years, and does not reduce the principal mortgage balance.
This type of loan can be beneficial for a number of reasons, but primarily suits those that are expecting future income growth, or investors that are looking to reduce any upfront expenses. While this results in lower monthly payments, once the agreed period is over, you will have to begin paying both the interest and principal payments, which will increase your monthly payments.
This can seem like an easy and appealing decision to make, however as a borrower you should ensure that you have a clear financial strategy in place to manage your funds, and ensure you have long term stability. While this can be a great financial investment for some, there are a number of pros and cons to consider before taking this step.
Pros:
- Lower repayments during the interest only period can help you save more money that you can put towards paying off other debts.
- Great for shorter loans such as construction loans or bridging finances.
- As an investor you could be claiming higher tax deductions from an investment property.
Cons:
- You may end up paying a higher amount in interest over the course of the loan.
- You pay nothing off the principal during the interest-only period, so the amount borrowed doesn’t reduce.
- If your property doesn’t increase in value during the interest-only period, you won’t build up any equity.
Managing the transition from paying off the interest only, to both principal and interest.
Going into a loan like this you may feel incredibly confident about all of the fine details, and understanding of the eventual monthly repayment increase, however it may come as a shock when that time comes. Your situations may have improved just as you had planned, but you may also find yourself struggling to now make the new repayments.
Here are some tips and tricks to help you manage this transition.
Gradually increase your loan repayments
If you have the option to make additional repayments, then a great way to bridge this gap is by gradually making higher repayments. Do some research into what your repayments will be once you’re paying off both interest and principal, and start putting aside that bit extra.
E.g if your repayments are going to increase by $1,000, then start putting aside an extra $100 each month, and increasing your payments.
Chat to your lender
By chatting to your lender, you may be able to get a better interest rate, or discuss the terms of your loan to come to a new agreement that factors in your current financial position.
Reach out to our team today to discuss if an interest only home loan could be right for you.
Let us point you in the right direction and turn your homeownership dreams into a reality.