What Are Interest-Only Loans?

You repay only the interest on the amount borrowed usually for the first one to five years of the loan, although some lenders offer longer terms. Because you’re not also paying off the principal, your monthly repayments are lower. At the end of the interest-only period, you begin to pay off both interest and principal. These loans are especially popular with investors who plan to pay off the principal when the property is sold, having achieved capital growth.

Pros

  • Lower regular repayments during the interest only period.
  • If it is not a fixed rate loan, you have the flexibility to pay off, and often redraw, the principal at your convenience.

Cons

  • At the end of the interest only period you have the same level of debt as when you started.
  • If you’re not able to extend your interest-only period, you could face the possibility of increased repayments.
  • You could face a sudden increase in regular repayments at the end of the interest-only period.

Lending restrictions in recent years has prompted lenders to curb the amount of interest only loans they hold at their institution. This has resulted in interest only products being priced higher than their principal and interest counterparts. As a result even investors are now often turning away from these products for their investment loans, whereas once interest only loans were the staple product for practically all investment purposes.

Our brokers will be able to help you choose whether an interest only loan is right for your unique circumstance in consultation with advice from your accountant or financial planner.

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