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Interest only loans – are they worth it?

Interest only mortgageFor a long period of time, interest-only mortgage payments have been the go-to option for many property investors.

By only having to make repayments based on interest levels, investors are able to unlock a property’s equity. Although the bank retains ownership of the property, the investor pays interest and gains access to any available equity, which is highly valuable in the eyes of many investors.

The majority of banks, however, limit interest-only loans to 5 years. After this period, investors must make the decision to either revert to a standard loan with the bank, or find another bank who will refinance the loan and start the process over again.

It’s not uncommon for investors to actually use this as a long-term method, running as many as 20 interest-only properties at any one time. Others, however, use the interest-only period as an opportunity to gradually increase their tenants’ rent over time to the point where their cashflow is positive.

It’s a viable option for homebuyers too

For those who are young and starting out in the professional world, interest-only loans are also an attractive proposition. This is because they allow buyers to stretch their budget during the interest-only period, relying on the fact that they’ll most likely earn promotions before larger repayments are required.

For many, this is the difference between securing a property in a desirable area and not.

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Be wary of stretching your budget

Although interest-only loans can be a great method of broadening your horizons, you shouldn’t ever push yourself too far. If interest rates rise over the next few years, you could struggle to make the required payments, landing you in deep water.

Regardless of your future goals, as a homeowner your aim should be to pay off your debt to the bank as soon as possible.

Speak with a professional mortgage adviser

If you’re uncertain of your financial capabilities and are wary of jumping into a decision with a property, consult with a professional mortgage or loan adviser. They’ll be able to give you the information you need, so that you don’t make a decision you’ll financially regret further down the line.

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