 As its name suggests, an 'interest only' loan requires you to pay only the interest on the home loan - not the principal (ie. the original amount you borrowed). Therefore for as long as it retains its status as 'interest only' a loan would never be paid off.
If you intend to purchase and owner occupied property that may be rented out in the future you need professional advice from an experienced mortgage broker on how to correctly structure this loan - good advice could save you tens of thousands of dollars.
In almost all cases, an interest only loan will come with the option of paying off more than the interest due. Given this, if you are not paying anything for the interest only option it makes sense to elect it.
The advantages of interest only home loans are:
- You can pay smaller repayments if you wish
- combined with a 100% offset account you have a very good tax effective loan. You can reduce the net loan balance by depositing funds into the offset account then withdraw those funds for any purpose and original loan will most probably still be deductible borrowing
- You can nevertheless make larger repayments which pay off your principal (so in effect you can elect at any time to treat your loan like a standard principal and interest loan which will be entirely paid off over time)
- You preserve a higher credit limit if ever you want to redraw money back up to your original borrowing limit.
- For investment loans on which the interest is tax deductible, an interest only option is often valuable as it gives you the option of maximising the size of your ongoing investment loan and so the deductions you can claim. If you also have a home loan on which the interest is not deductible, the interest only investment loan can enable you to put all your spare cash into paying off the home loan. This increases the amount of money available for your next investment.
If you feel you need the discipline of principal and interest payments to make sure you pay off your loan, you may want to stick with a principal and interest loan - even if you can elect to have an interest only loan at no additional cost.
If you are concerned that the 'interest only' period might come to an end, you may want to get a 'line of credit'. However unless you have specific reasons, be careful if you need to pay more for a line of credit. You can often get by with an interest only loan. And if the 'interest only' period ends, you can always tell your lender that if they don't extend it, you'll be off to visit their competitor (receiving another hefty discount from Peach for the refinance). Already we know of one bank which now has a policy of automatically allowing clients to get a five year extension on their interest only loans. Other lenders are likely to follow suit.
Interest only loans used to be only available to those on professional packages or on highly optioned loans which had high interest rates. However a number of lenders have cottoned on to the demand from smaller borrowers and now offer them for rates only around 0.1% above basic variable rate loans. For those who can't qualify for a professional package, these loans are good value.
|
