With interest rates at an all-time low, now really is the time to think about buying a property.
Although you may think you haven’t enough equity in your own home, or you may think you your deposit is too small and you can’t afford the monthly payments, an interest only loan might be the way forward.
We are not financial specialists, but having been in real estate for over 40 years, we are familiar with a lot of finance options and can give you some information to think about.
Whether you’re refinancing or thinking about taking out a mortgage for the first time, it is important to be fully aware of what the pros and cons are, and what risk is involved so you can make a fully informed decision relative to your financial position.
Here are some questions answered about interest only loans:
What is an Interest Only Loan?
An interest only home loan is exactly what it says it is. A loan where you’re only paying off the interest and not the principle. Generally, these are offered for a set period of time and while there have been reports of lenders clamping down on interest-only loans, there are still plenty around willing to lend you the money on these terms.
What are the Benefits of an Interest Only Loan?
- Lower monthly payments
Because you’re only paying the interest, your monthly payments will be lower. Take for example a $300,000 mortgage over 25 years at a 5% interest rate. At an interest only rate, you’ll be paying approximately $1,250 per month as oppose to approximately $1,754 per month with a repayment mortgage.
- Frees up cash
People need extra cash at different times of their lives for all sorts of reasons – home renovation, periods of study or needing more cash for your business. Maybe children have come along or you’re wanting to make investments in other areas to build wealth. Whatever your reason, having an interest only mortgage for a period of time gives you the opportunity to work towards other goals or is a way to manage your finances if you’ve got a downturn in income.
- Maximises tax deductions for investors
Currently the interest of a loan is usually a tax-deductible benefit so for an investor, an interest only loan is a great opportunity to help maximise cash-flow and gives tax advantages. For a normal repayment mortgage paying off the principal results in a reduction on interest, which in turn reduces the dollar amount of the tax deduction.
- Make extra payments
There is often the opportunity to make extra payments during the interest only period, meaning you can still build equity in the property when you have extra cash.
- Varying length of interest only terms
You can often choose an interest-only term from 1, 3, 5 or 10 years. For investors, this helps you plan your tax minimisation strategies and cash-flow management. While homeowners can’t reap the tax benefits, you can still plan your finances while making the lower payments.
And the Downside?
- Rise in interest rates
Interest rates to have a habit of going up from time to time, so you may end up paying more if there is an increase in rates. But some lenders to offer a fixed rate period.
- May not build equity
With an interest only loan, you are not paying off the principle, so you are relying on house prices to rise to gain equity in the property.
- Still has to be paid off
As with any loan, it still has to be paid off at some point! There are options though, such as paying into another fund during the interest only period, renegotiating another interest-only term or selling the property.
What Should I do?
We are not financial specialists so you will need to speak to a professional who can do some number crunching for you – and we bet you’ll be surprised with what they come up with.
It is always important to ask what happens to the loan once the interest only period ends. Many revert to a principal and interest loan, which will obviously result in higher monthly payments.
Once you’ve spoken to financial specialist and you’ve worked out your budget, come to us and we’ll help you find the property to realise your real estate dreams.
Whether it’s for investment or for a home, we’d love to hear from you so give us ring us on 02 4954 8833 or call in at our Cardiff office.
We’re always looking at ways in which to help you get the best out of your property. With over 40 years in the business, our talented team is constantly looking for new and innovative ways to ensure your real estate experience is exceptional. This is why we are one of Newcastle’s longest established real estate offices.