Interest only home loans are a specific loan which allows for the repayment to be set for a specific set period of time where only the interest component is paid on the repayments, so the balance of the loan does not reduce with each repayment. This type of loan has commonly been used for those looking to manage their cash flow position especially for investors who setup specific lending structures whilst taking into consideration any taxation factors.
Generally an interest only period between 1-5 years, however there are some products and lenders which will allow terms greater than this. Likewise the process for requesting further interest only periods varies widely between lenders, so utilising the right lender when wanting to use an interest only loan is essential so you’re not stuck with a less than ideal setup in the future.
If you’re considering whether using an interest only home loan – there are some pros and cons which need to be considered.
Pros for using an interest only loan
The primary benefit of using an interest only loan is it significantly reduces the minimum required repayment of a home loan, freeing up cash flow to be able to be used elsewhere. For example, it is common for investors to use interest only loans for their investment loans, so they can instead focus any spare cash flow to pay down any personal debt including any mortgage on their own home.
Cons for using an interest only loan
Prior to the significant changes in the lending market by the Australian Prudential Regulatory Authority (APRA), there was minimal downside to utilising an interest only home loan. However since that time there has been large changes – including restrictions on the maximum loan value ratio (LVR), increased interest rates and restriction on which lenders offer interest only. This has meant that those wanting to use interest only are now facing a smaller pool of lenders to choose from, potentially higher interest rates and larger minimum deposit requirements for purchases.
So what is best for me?
What was once an obvious decision has now become a more significant and unique structuring question which needs the right advice. This is where a broker who is specialised can help you weigh up the options to balance cost, borrowing capacity considerations, cash flow and your future goals. If you would like to speak with an investment focused mortgage broker about whether using interest only loans is right for you, connect with us today.