Interest-only home loans

Interest-only home loans can have great benefits for investors: they can help with your debt-recycling strategy. Find out how you can make an interest-only loan work for you.

How does it work?

Interest-only loans differ from the more common principal and interest home loans because the borrower is only required to repay the interest over the loan term, leaving the principal balance in full and unpaid at the end of the term.

In order the repay the principal and discharge the loan, the borrower is generally required to sell or ‘flip’ the property for a substantial profit.

If the property has been held for an investment cycle, this may not be a difficult feat, due to capital growth. It can also mean significantly lower mortgage repayments for the borrower, who then has more free cash flow to invest in other properties.

Why does it suit investors?

Executive director Joe Sirianni of Smartline Personal Mortgage Advisers says interest-only loans are ideal for borrowers who want to maximise their cash flow and minimise their loan repayments.

“They are generally used by property investors who are happy to simply service the loan while they benefit from the capital growth of their investment,” Sirianni says.

“For aggressive investors, this can allow them to purchase additional properties with minimal ongoing financial commitments.”

Are they just for investors?

While their ability to free up cash flow makes them an attractive option for investor borrowers, Sirianni says some owner-occupiers have benefited from interest-only loans as well.

“Owner-occupiers might want to reduce their home loan commitments for a period of time (say, while one partner isn’t working or during the early days of a property purchase),” he says.

“They can be a good option for first-home buyers who might have stretched themselves to buy their home, but know they will have higher incomes in the coming years.

“An interest-only loan would allow them to more comfortably make their principal and interest repayments,” Sirianni adds.

What are the risks?

Sirianni advises that the main risk lies in first-home buyers and other owner-occupiers who use interest-only loans for a long term, rather than as a short-term solution.

“By not reducing the home loan balance as an owner-occupier, you’re not maximising the amount of equity you are building up in the property, which should be your goal.

“Keep in mind that the loan has to be repaid at some point, whether it’s for an investment or your own home, so you need to have a strategy as to how the loan will be repaid.”

Sirianni also warns that having an interest-only loan is in a way a ‘false economy’.

“Long-term, you should be looking to reduce your home loan debt. If you can’t afford principal and interest repayments, you would perhaps have to question whether you should have a mortgage,” he says.

How to choose the right loan for me?

According to Sirianni, advice from a quality mortgage adviser is essential for anyone considering an interest-only loan.

“You need to determine if such a product is right for you and your individual circumstances, and how and when you may make the move to principal and interest repayments,” he says.

“You should also seek advice to ensure the interest-only loan you choose has the flexibility to make additional repayments, change easily, and the like.”

Speak to a broker or financial adviser today about how an interest-only loan might help you get your next property.