Understanding ‘Interest only’ loans...

Have you ever noticed how certain real estate terms get used quite frequently without a lot of people really understanding what they mean?

We had an example of this quite recently, when a home buyer was talking about using an “interest only loan”, but didn’t fully understand what the term meant. As the name suggests, an interest only loan is one where the borrower only repays the interest that they incur, not the principal that they borrow. As a result the repayments are lower than they would be if they were repaying both principal and interest.

However, this option is normally only available to investors, and for a shorter period of time than a normal home loan. Some investors find this option appealing as the saved repayments can be used for another purpose, such as an additional investment.

It is an option that is often considered by those people who plan on selling the property within a few years of buying it. The important factor to keep in mind is that the loan amount is still due when the interest only period ends, so careful planning is required if you are going to use this type of facility.

Also remember that because you are not repaying the principal of the loan, you are not building equity in the property the way you do with a normal loan.

As you can see, an interest only loan will not suit everyone’s strategy. This is one more reason why we always recommend that you seek out the advice of an experienced and independent mortgage broker before you commit to any form of home loan.