Compare interest-only investment loans
Interest-only home loans can allow investors to secure a property while minimizing their repayments.
A home loan repayment typically consists of two parts: the amount you borrow (the principal) and the interest charged by the lender based on the loan amount. Typical home loans charge something called “P&I” – or principal and interest.
With an interest-only home loan, the minimum repayments will only cover the interest charges on the loan for an agreed period of time without the principal being affected. Therefore, the ultimate underlying balance will not decrease during the interest-only period.
Interest-only home loans tend to have higher interest rates than P&I home loans, but there are still some advantages to choosing an interest-only loan for the first few years as an investor.
Buying an investment property or looking to refinance? The table below shows interest-only home loans with some of the lowest interest rates in the market for investors.
Benefits of Interest-Only Investment Loans
The main objective of the investing game is to buy a property that will increase in value over time and hopefully someday sell it at a profit while collecting rental income. This is called capital gains.
The idea with interest-only investment loans is that when an investor sells the property, they can use the money to pay off the principal while making a profit.
Interest-only home loans can also allow investors to secure real estate while minimizing their repayments. This could be especially useful when trying to find tenants and minimize other start-up costs.
The other benefit is at tax time. During the interest-only period, because you are not repaying the principal of the property, the entire interest-only portion can be deducted from your income. In some cases, you can also choose to pay interest annually in advance, to reduce your taxable income.
Disadvantages of Interest-Only Investment Loans
It’s important to remember that even if the interest-only payments are lower than you also pay the principal component, the loan balance does not go down.
At the end of an interest-only period, the loan balance must be repaid to the bank over the period remaining before the end of the loan. This means that the principal and interest repayments will often be higher than before the interest-only period.
Once you start paying both principal and interest, only the interest on your investment home loan can be claimed as a tax deduction.
There is also always a risk with interest only loans that the value of the property will not increase sufficiently. In this case, you could end up with a large debt and the mortgage principal at the time of sale exceeds the price for which you sold the property. By combining this with other investment costs, legal person fees, rates and more, the costs could start to add up.
In addition, interest-only loans generally have higher interest rates than principal and interest loans. You will also pay more interest over the life of the loan because you are not reducing the loan during the interest-only period.
Image by Max Bottinger via Unsplash
The entire market was not taken into account in the selection of the above products. Instead, a smaller part of the market has been envisioned, which includes the retail products of at least the Big Four Banks, the Top 10 Customer-Owned Institutions and Australia’s largest non-banks:
Products from some vendors may not be available in all states. To be taken into account, the product and the price must be clearly published on the website of the supplier of the product.
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*Comparison rate is based on a loan of $ 150,000 over 25 years. Please note that the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as withdrawal fees and cost savings such as fee waivers are not included in the comparison rate but may influence the cost of the loan.