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When does an interest-only mortgage make sense, and when does it make cents?

An “interest-only” mortgage is when the borrower is only paying the interest accruing on their loan, without paying back any of the principal (the original amount borrowed). It’s less common than it once was, partly due to low interest rates and recent lending restrictions, but there are times when it makes sense (and cents!)

Interest-only mortgages for investors

There are often significant benefits for investors to have an interest-only mortgage structure, particularly if you still have a home loan on your owner-occupied property. There are two key advantages to going interest-only for an investment property:

Maximise tax efficiency - For an investment property, interest paid is tax deductible as it is an expense of owning the property.  This means an interest-only loan can reduce your tax bill.

Lower repayments – As interest-only mortgages aren’t paying down any principal, repayments are lower, making investing more affordable for cash-strapped investors

Interest-only mortgages for owner occupiers

The lower repayments which come with interest-only loans are appealing, and sometimes necessary, for owner occupiers. Some of the most common reasons are when couples are struggling to cope going down to one income, starting a business, financial hardship, or during the build of a new home.

Disadvantages of interest-only

More susceptible to interest rate hikes – Without paying any principal, the full outstanding loan is impacted by interest rate changes.

Will cost more in the long-run – When paying interest only, the total interest you pay over the term will be higher than if you were paying principal as well.

Things to note

  • Banks have recently reduced the ability to get interest-only loans or extend interest-only without good reason – so it might not be guaranteed that it can be continued for the full term of your loan
  • When you eventually come off interest-only the repayments are amortised over the remaining term of your loan – which means if opting for interest-only for the first 2 years of a 30 year home loan, you would need to repay the entire mortgage off over the remaining 28 years
  • Interest-only loans are not often an option for first home buyers, as lenders often require a certain level of equity

So, is interest-only best for you?

There’s no hard and fast rules about when an interest-only loan is best – it very much depends on your situation, your cashflow, and your short-term and long-term needs and goals. Having a chat with an Apex mortgage adviser is a great start – flick us an email to arrange a call or meeting. 



 

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