What Is An Interest Only Mortgage?
Interest only mortgage home loans while becoming more popular, are a long way from taking over from the standard principal and interest home loan as the norm for most borrowers in Australia. In the standard home loan your monthly repayment takes care of the banks interest first, then settles a little of your outstanding debt. If you make the minimum payment required by your lender, you will generally pay off your loan in the period described in your loan document. 25 to 30 years is the norm. Interest only, allows you to just pay the interest on your outstanding principle, giving you a lower repayment in most cases.
Why Would I consider A Interest Only Mortgage?
The ever present threat of a rise in official interest rates makes this style of loan a must for any savvy borrower. A lower monthly payment leaves room for saving or use of an offset account. My opinion is that, interest only home loans are an intelligent option for most people, especially for the first 5 to 10 years of borrowing. The first few years of a loan can be the make or break of property ownership. Having a lower payment will allow you to better manage your money and maybe allow you add value to your property with improvements.
Example Of Interest Only Mortgage Use
Kelly has found a nice vacant block and plans borrow to build a new home for her and the kids. Her bank has approved a home loan limit of $350,000, which will cover the cost of the vacant block and 80% of the home construction. Kelly will have to rent a house while her home is built. Meeting the rent and the loan repayment may put undue pressure on Kelly’s finances. A standard home loan may require full monthly payments. With an interest only loan, Kelly will only have to pay the interest due on any construction instalments drawn by her lender to pay her builder, while she is renting.
With this in mind, Kelly was advised by her lender that an interest only loan for the first two years of her loan may work best for her.
Pitfalls of Interest Only Mortgage
In the short term, using the money saved through having lower monthly repayments can be very helpful to fund your basic essentials of life, however, sustained use may dig you a financial hole. Best to be motivated to make money, save and eventually pay off your loan. Most interest only loans allow you to pay lump sums off your principal at various periods. Getting 15 years into a home loan contract and still owing the original amount may become a little depressing.
Where To Get An Interest Only Mortgage
An interest only mortgage can get you started in property ownership and give you options for wealth building. Seek out a competent lending professional like a mortgage broker for more information about interest only options for your next property purchase.