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The RBA has raised the official cash rate to 4.35%. Chat with us today to make sure you’re not overpaying your loan. The RBA has raised the official cash rate to 4.10%. Chat with us today to make sure you’re not overpaying your loan.
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Interest Only Investment Loan

Interest only investment loans allow you to keep your monthly payments down by only paying off the interest.

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interest only investment loan

Interest Only Investment Loan

For typical home loan repayments, there are two parts of the loan. This is usually referred to as the principal and interest loan, stating the two elements in the name. The principal component is the amount that you borrow, with the interest component being how much the lender charges you on top of the amount that you owe.

However, interest-only investment loans work slightly differently. With this type of home loan, your minimum repayments will cover the interest charges for an agreed period of time. The interest only period ends on the agreed upon date, which will have been discussed beforehand so that both parties are aware of the terms. For the borrower, this means that the loan balance will not be reduced during this time as you are not making any repayments on the balance.

This is the type of home loan that may be suitable for people who are looking for a temporary way to reduce the money that they are paying out each month. You may find yourself in this position if you are attempting to manage a drop in your income that is not expected to last for an extended period. Or, if you are a property investor, this can be used in order to maximise your tax deductible.

It is quite a straightforward process with very few steps to take. The key point of an interest only investment loan is that the repayments only cover the interest that is gathering on the amount that you have borrowed. This happens for a set period of time that is agreed to by both parties before the agreement begins.

As such, you will not be paying any money off of the amount that you originally borrowed during the interest only period. Essentially, while you are making payments to the lender, the amount that you borrowed and are required to pay back is not decreasing.

Once the interest only period ends, your loan will automatically change. It will switch to a principal and interest loan. This will cause your repayments to rise, as you will then be paying off the interest as well as the amount that you owe.

Before you agree to this type of loan, ensure that you are going to be able to make the repayments using a repayment calculator.

Like everything else in the world, there are both pros and cons to interest-only loans. It’s important to look at both sides of the argument before you decide whether or not this is the right option for you financially, or if there is something else that would serve you better.

With every pro comes it’s con, and interest only loans are no different. You may find that the interest rate is cheaper on a principal and interest loan than it is on an interest only loan. The main reason behind this being that lenders still need to make money somehow, and if increasing the interest rates on interest only loans brings results then this is what happens. Don’t forget that your monthly payments are only covering the interest.

This leads us nicely to our next con, which is that you are not getting any closer to paying off the balance. The sum that you borrowed remains unchanged while you make monthly payments to cover the interest gathering. However, paying only the interest portion can only last for so long. Once the agreed upon loan term has come to an end, your monthly payments are going to start to rise. This may not be affordable to you depending on your financial circumstances.

In short, the cons are as follows:

  • – During the interest only period, you pay nothing off of the principal, meaning you are in the same amount of debt.
  • – Monthly repayments will rise once the interest-only period is finished, but this may not be affordable to you.
  • – The interest rate may well be higher than if you were to choose a principal and interest loan.
  • – You are at risk if your property doesn’t increase in value over the interest-only period. Building up equity will be impossible, and this is risky for you if you want to sell the property.

 

 

You are not limited to only one option when it comes to investment property loan options. You can choose to make interest only payments if you apply for a loan that allows these. A large number of companies allow you a maximum of 10 years, perhaps suiting your individual circumstances the best at the time.

Another possibility to consider is a fixed rate loan. This type of loan gives you certainty during the fixed period. However, if something that is a little more flexible is what you are searching for, then a variable loan may be the better option. This type of loan gives you the opportunity to save on interest and make extra repayments.

If you think that the best loan for you as an individual or as a company would be a mixture of the two, then you should be looking into a split loan. You can talk to lenders about these loan types and their loan terms.

 

Once you have agreed to the terms of the interest only period, you may be curious to know about how much your monthly repayments are going to be at the end of this term. You can use a mortgage calculator, and speak with a mortgage broker to get the answers that you need.

It’s imperative that you look into this before you agree to anything involving interest payments, as it might be keeping the loan amount down for now, but it’s not always helping in the long-term. You need to ensure that you can afford the higher repayments on the investment loan, while also keeping in mind that interest rates can rise, bringing your payments up.

Switching from interest only to principal and interest may take a little bit of time and adjustment. When you get used to one level of payment, it is often diffcult to handle the change when it comes about. As such, here are some tips that will help you to cope a little easier when the switch comes about.

In order to make the transition as simple as possible, it is important that you work your way up to making higher repayments before the end of the interest only period. This is only going to work if your loan allows you to make extra repayments. You may not want to make these extra repayments, but it is going to make your life so much easier down the road if you do. In order to do this, you have got to check when your payments are going to go up, and how much they are going to rise by.

Once you have the information that you need, you can start working on gradually increasing your payments so that the jump doesn’t seem so bad. For example, if you know that your repayments are going to rise by $1000, work on paying an extra $100 per month to start paying o� the loan principal as well as the interest.

Ideally, you want the best rate that you can find on the market. Don’t just choose the first option that you come across because you don’t want to put the effort into doing the research. It doesn’t have to be an arduous process as you can use a comparison website to get the answers that you need. Sites such as this will help you to find a lower rate for a similar loan, providing you with what you need, while worrying less about the future. If you would like to stay with your current mortgage provider, ask them to match the deal that you have found or offer you something cheaper.

You can consider switching your home loans if the lender you are with now refuses to offer you a better deal. However, it is essential that you look at all the costs, making sure that the benefit is worth the amount that it is going to cost you to switch.

 

Typically, you will find that most lenders are willing to offer you options if you will not be able to afford the repayments. If you find yourself worrying about this, talking to your lender is the first step that you should take. It may be possible to have the terms of the loan altered to minimize the amount of stress that you are under. Or, your lender may be able to temporarily reduce your payments to allow you to catch up.

Speaking to your lender might seem daunting, but it won’t be as daunting as not being able to make the payments now that they are not only interest repayments.

If you have any questions about your interest only period, if you are interested in the specific lending criteria that you are subjected to or anything else, then you should talk to your lender. They will be able to give you all of the information that you need to make an informed choice.

Hopefully, you have found this article educational and informative, now having all the information that you need about interest only loans. Key pieces of information to take away from this article are that you should always check the interest rates that you agree to before you sign one of these contracts, and that this only lasts for the interest only period, no longer and then switches to principal and interest repayments. Consider all of your options before making a final choice. It’s important to compare interest rates, check that you will be able to afford these mortgage repayments. and ensure that you are only looking at lenders who hold an Australian credit licence.

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The RBA has raised the official cash rate to 3.35%. Chat with us today to make sure you’re not overpaying your loan. The RBA has raised the official cash rate to 3.10%. Chat with us today to make sure you’re not overpaying your loan.
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