What is an interest only home loan?
With an interest only home loan there is no reduction in the principal loan amount while the borrower makes repayments based on the interest portion of the loan. After the interest only period, normally between 1 and 5 years the loan goes back to traditional interest and principal repayments
Interest only home loan advantages and disadvantages
Interest only home loans have positives and negatives. When deciding if it is the right home loan option for you, you need to consider:
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Your personal financial situation.
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Possible interest rate fluctuations as your repayment will be based on the interest rate of the home loan.
Interest only home loan advantages
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Lower repayments over the interest only period as you do not pay the principal portion of the loan.
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Interest only loans have better tax benefits on investment loans because the principal portion of the loan does not reduce.
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Interest only loans home loans can be used by borrowers for short term purposes such as construction loans and bridging loans.
Interest only home loan disadvantages
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Interest only home loan repayments that revert to a principal and interest traditional home loan structure some times have a higher interest rate.
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Your repayments increase once the principal component is taken into account for a number of reasons. Firstly, for the interest only period, borrowers do not pay any principal, and secondly the principal repayments are calculated on the term balance of the loan.
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You will generally not build up any significant equity over the interest free period due to not reducing the principal amount owed. Capital growth is depend on market conditions, and you also need to consider if properties decrease in value over the interest only period.
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There is likely to be a harder approval process as there is a limit to the amount of interest only loans a lender is allowed to provide per financial year.
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Interest rates on interest only home loans are likely to be higher than more traditional home loans.
Do interest only home loans suit my needs?
It is recommended that you get some financial advise on interest only loans as they generally suit a few type of borrowers.
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Those borrowers that need short term loan arrangements, such as construction loans and bridging loans.
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Borrowers whose benefits outweigh the long term costs such as an investor maximising tax deductions and benefits.
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Borrowers who can effectively budget to meet higher future loan repayments.
What's the Yellow Line?
Buying a home is likely to be the largest financial decision you will make. There are a vast range of products and banks are extremely competitive. It is best to seek professional financial advise to ensure you obtain the most appropriate home loan product for your needs.
Yellow loans has a vast range of lenders with a range of products to achieve the best results on obtaining the best home loan deal for you. You can contact us here and we can get your future looking bright.