Interest Only Home Loans. Jessica Arabia, Finance Prospects

Interest only home loans are a type of home loan product traditionally used by investors who do not have the intention to pay down the loan from day one. For many this strategy is commonly used as it helps investors to start out with building their portfolios, although if you are unsure if this option is suitable for you don’t hesitate to talk to your mortgage broker about the most suitable options that are available to you.

How Interest only loans work

An interest only home loan is a type of home loan where you only have to make repayments based on the interest charged on the loan, this is usually for a set period of time say between one and five years. During this time when making the interest only repayments, the initial home loan balance remains the same until you start to pay down the principal as well as interest otherwise known as Principal and Interest (P&I) repayments. Interest only loans typically have a maximum period of 5 years, after which the loan reverts to Principal and Interest repayments based on the outstanding loan amount based over a 25 year loan term not a 30 year term. This means once this time comes that your Interest Only repayments roll over to P&I repayments the monthly repayment amount will be higher unless you are in a position to carry out a refinance to a more cost effective product that will be based over a new 30 year loan term. You can in some cases apply for another interest only period after the initial period has come to an end, however it will be best to talk to your mortgage broker to find out if this option is actually suitable for you.

Interest only and owner occupied homes

Interest only home loans are not a great option for owner occupied home loan scenarios. In cases where interest only repayments are applied to owner occupied scenarios this can be due to individuals choosing to minimise their monthly repayments for a variety of reasons. Some negatives that come with owner occupied home loans having an interest only home loan product set up are:

·       The required repayments can rise substantially when the loan reverts to P&I repayments

·       You as the home owner will not be paying down your debt.

If you are living in your own home and are thinking about whether you should go ahead with this type of home loan product, it is important this option is carefully considered and spoken about with your mortgage broker about advantages and disadvantages involved. Unfortunately if you can't afford to make P&I repayments on your own home loan, it's likely that you've borrowed more than your budget will allow so don’t hesitate to talk with a professional about your options.

If you have any queries or a question regarding specific information around home loans or home loans in general, don’t hesitate to get in touch with our friendly team on 08 8344 9933 or email Jessica at jessica@financeprospects.com.au to find out more about the options available to you.