Interest-only loans are home loans that allow borrowers to delay the principal repayment of the borrowed amount for a term, usually 1 to 5 years. During this time, you are only asked to pay the interest on your loan, not the principal. At the end of the Interest only period, borrowers start to pay the principal as well as the interest. An interest-only loan usually has the same length as a standard home loan, around 30 years. Although the borrowers will have a lower repayment during the interest-only period, they then will pay substantially more for the remaining years. We can summarize the interest-only home loan as 'pay less now but more later'.
Interest-only loans can be considered a better strategy when purchasing an investment property for several reasons, but it’s essential to weigh the pros and cons carefully:
Pros of Interest-only loan:
Lower repayment: During the interest-only period, borrowers have lower monthly repayments, which can free up funds for other uses such as renovations or paying off other debts.
Investment strategy: Investors may benefit from interest-only loans, as they can reduce their immediate expenses, allowing them to potentially maximize other investments.
Buying time: In times of financial stress or temporary income reduction, interest-only loans provide investors with flexibility by delaying higher repayments.
Cons of Interest-only loan:
Higher Overall Interest Costs: Since borrowers are not paying down the principal during the interest-only period, they end up paying more over the life of the loan.
Higher Interest Rates: Interest-only loans often come with higher interest rates compared to principal and interest loans, leading to higher overall repayments.
Less Equity Buildup: Unlike principal and interest home loans, interest-only loans don't contribute to building equity in the property. This means investors won't own a larger share of the property over time.
Worse Borrowing Power: Compared to standard principal and interest home loans, interest-only loans have higher interest rate and less years for principal repayments, resulting a worse borrowing power.
Investors need a good understanding of the real estate market to make informed decisions about using interest-only loans.
Investors should carefully assess their financial goals, risk tolerance, and market conditions before opting for an interest-only loan. MoreMore Finance can provide our customers with professional advice and exclusive market insights which can be valuable in making informed investment decisions.
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