Interest Only Home Loan


Information, money saving tips and commentary on Interest Only Loans in Australia
Interest Only Home Loan What is an Interest Only Loan? An Interest Only Loan as the name suggests requires the borrower to repay the interest only and nothing off the principal. The interest rate can be variable or fixed and the term is usually relatively short, often only one to five years. At the end of the loan period you still owe the full amount of the original loan. Interest Only loans are popular with property investors in particular for several reasons. When interest rates are rising property investors have a degree of insulation from excessive repayments that may otherwise trigger cash flow problems. Regardless of whether interest rates are rising or falling, the fact that interest only loan repayments are less than repayments on a principal and interest type loan, means that an investor retains more profits from rents or can afford to purchase a higher value property. Interest Only home loans for average home buyers are not very common in Australia, but in some countries where property is very expensive they help to make owning property more affordable.
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Interest Only Loans

Features of Interest Only Loans

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.

Benefits of Interest Only Loans

Enables investors access to large tax deductions through negative gearing.
Allows investors to buy investment properties with a limited cash outlay.
Stability of repayments makes budgeting easy (fixed interest only).
Repayments are lower than a principal and interest loan.
Higher retained profits from rents for investors, or
Higher disposable income for non-investor home buyers.

Tips and strategies

Avoid loans with monthly account fees
Make extra loan payments using your increased disposable income
Have your wages paid into your loan account to reduce interest and use the interest free period on a credit card for purchases before paying the credit card bill from the loan account
Put lump sum payments like tax refunds into your loan account. If required later use the redraw facility.

Example Rates and Fees

Fixed Rate Home Loan NO FEES (June 2008):

Monthly fee NIL
Annual fee NIL
Redraw fee NIL
Extra Payment fee NIL
Fixing fee NIL

Low Rate 7.97% std. variable
CCR 8.08%*
*Based on $300,000 Loan over 25 years.

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