Friday, March 18, 2005

Australia Interest Only Home Loan

Interest Only Loan interest rates depend on whether it is a fixed or variable rate loan. The type of loan you choose depends on your ability to predict future movements in interest rates or the requirement of stability for peace of mind.

Probably the main advantage of fixed interest rate loans is the stability of knowing what your repayments are going to be for the period of the loan. This is particularly important for investors with multiple properties, especially if they are negatively geared. It is important to realise that if official interest rates fall you may end up paying more in repayments than if you had a variable rate loan.

Variable Rate loans usually have more features and are cheaper, especially when interest rates are falling.

The danger with Interest Only loans is that in a declining property market there is a risk that a property may be worth less at the end of the loan term than what it was originally purchased for. There may not be enough equity in the property to repay the loan principal. With Interest Only loans it is very important to buy property that increases in value sufficient to cover mortgage and holding costs.

At the end of a loan term the loan is usually paid out or refinanced. In some cases it may revert to a principal and interest loan.

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