First Home Buyers

Interest Only

As the name suggests, an interest only home loan requires a borrower to repay just the loan’s interest and not the principal loan amount. The interest repayment can either be fixed or variable and it is only offered for a short period of time of one to five years. However, time will come that you will have to pay the principal loan amount.

This type of loan is popular among property investors because they can use their finances for other investments while satisfying the interest amount of this loan. That way, they can limit the cash flow problems that might arise.

No matter what the movement of the interest rate is, the interest only home loan is paid at a lower value than the interest and principal loan. Therefore, an investor can keep more of his earnings from investments which in turn will be used to buy other properties of higher value. For home buyers, an interest only home loan is not that popular but they can help make owning property an affordable task.

The interest rate of an interest only home loan depends on whether it is a fixed or variable loan. This decision will depend on how market conditions shake up or whether you want a stable repayment amount.

Some investors who have multiple properties go for a fixed rate interest only home loan to be able to calculate their expenses well. However, they will end up paying a higher rate if the official cash rate goes down. Meanwhile, a variable rate interest only loan heavily depends on the movement of the official cash rate and they have more useful features.

However, an interest only home loan has some risks involved. If the prices in the property market are declining, there is a possibility that the property is worth less than its original value. This means that the property’s equity might not be enough to repay the principal loan amount.