Interest Only Home Loans

An interest only home loan is a home loan where you pay only the interest charge every month. For example, if you have a mortgage of $100,000 over a 30 year term, and went for interest only repayments for the first 3 years, you would pay just the interest charges for the first 3 years, and you would still owe $100,000 after those 3 years (assuming you didn’t make any extra repayments to your home loan). Then for the remainder of the home loan term, 27 years, the home loan would revert to principle and interest repayments, and your repayments would increase to pay the home loan down over that period. You may be able to re switch your home loan to interest only if it suits your needs.

You may be able to choose an interest only term, depending on your bank or lenders credit policy, from 1 to 10 years. Interest only repayments are available on both variable rate and fixed rate home loans.

Interest only home loans generally have a higher interest rate than a home loan with principle and interest repayments. Banks may consider interest only home loans for owner occupied purposes, but generally speaking interest only home loans are for investment, like an investment property. 

Advantages

• If the home loan is for investment the interest charges might be tax deductible, so keeping the principle of the loan the same, you might maximize your tax deduction benefits. 
• You may, in the short-term want to decrease your repayments, so interest only repayments may help your monthly budget.
• The home you are purchasing to live in, may become an investment property in the future, so you want to keep the debt as high as possible, to maximize your tax benefits when the property use does become investment.
• Some banks and lenders offer an offset account, which will offset against a variable rate interest only home loan.
• You can have a fixed rate or variable rate home loan with interest only repayments. 

Disadvantages

• The interest rates for an interest only home loan are generally more expensive, that is have a higher interest rate.
• At the end of the interest only period, your home loan repayments will change to principle and interest repayments, and your repayments will increase as you are paying your home loan off the remainder of the term of your home loan. See the example of what happens to your home loan repayments below. 

General Interest Only Home Loan Fees

• An application fee may apply to your interest only home loan.
• Your interest only home loan may have a monthly fee.
• If your loan is greater than 80% of the property value, you will pay a once off mortgage insurance fee.

Loan Term And Repayment Types

• Home loan terms from 5 to 30 years (Depending on the bank or lenders credit policy)

To give an example of how an interest only loan may affect your home loan repayments, once your home loan comes out of its interest period, lets look at a $300,000 home loan, with an original loan term of 30 years, and the various repayments at an example interest rate of 5%. Interest rates can change, this is just an example using the same interest rate. 

A $300,000 home loan at 5% over 30 years - the monthly repayment is $1,610.46 with principle and interest repayments. 

A $300,000 home loan at 5% over 30 years - the monthly repayment is $1,250.00 with interest only repayments during the interest only period. 

If you had an interest only home loan for 5 years, your loan principle will now be paid over the remaining 25 years of your loan term. Your repayments would be -

A $300,000 home loan at 5% over 25 years - the monthly repayment is $1,753.77 with principle and interest repayments. 

If you had an interest only home loan for 10 years, your loan principle will now be paid over the remaining 20 years of your loan term. Your repayments would be -

A $300,000 home loan at 5% over 20 years - the monthly repayment is $1,979.87 with principle and interest repayments. 

As you can see with the examples, if you have an interest only period with your home loan, the repayments will increase, once your interest only term expires. This is where caution is needed, as an interest only home loan may lower your repayments whilst the loan is in its interest only period, but your repayments will increase, after the interest only period expires and your home loan reverts to principle and interest repayments. 

There are many reasons why you may choose interest only repayments. You should speak to your accountant or financial advisor, to see if this option may suit your financial needs.

If you would like some more information on interest only home loans, contact Perth Mortgage Broker Group , or call Troy on 0411 229 602, 7 days a week.