Interest-Only Loans
If you’re in the market for home or investment property finance, you may be mulling over an interest only loan to minimize your initial outgoing cash flow.
The team at Investors Mortgage wants to provide clear, helpful information on how interest only loans work to support your borrowing decisions.
Interest Only Loans: Lower Payments, Wealth Building, and Tax Benefits
What is an Interest Only Loan?
With an interest only loan, you only pay the interest costs owing on your mortgage for an initial period (usually 1-5 years). You don’t repay any of the loan principal during that interest only period. This keeps your regular repayments lower than other loan types.
When Does My Principal Get Repaid?
After the interest only period finishes, your loan automatically switches over to principal + interest repayments. So you then start to pay off the original loan balance. The interest costs still get calculated on what remains owing on the principal amount.
What are the Pros?
A key benefit of interest only loans is the temporary lower payments. This can help you reduce the initial commitments and get your foot in the door sooner to build wealth. Interest only also creates some tax deduction benefits for investment property owners.
Points for Consideration
Interest only loan means you aren’t paying down debt and will end up paying more interest overall. Staying interest only long term can slow equity growth, and this could put you at risk if you need to sell or refinance when the market declines.