Interest-only home loans are often used by investors to purchase an investment property. An interest-only loan is where borrowers only have to pay interest on the loan plus any fees associated with the loan. Borrowers are usually able to do this for a fixed term of five years.
Why use an interest-only loan?
There are a number of reasons why investors choose the interest-only option on their home loan.
- Lower repayments. Paying interest-only on a loan for a fixed term makes the repayments on that mortgage lower for that period of time.
- Maximise their tax deductions. Interest-only loans are more commonly used by investors who want to reduce their repayments and maximise their tax deductions - these investors are using a ‘negative gearing’ strategy hoping that they will make a profit from the capital gain (increase in value) over a period of years.
But what happens after this interest-only term is finished?
When the interest-only term is finished, the home loan reverts back to principal and interest. This can often catch people off guard as their repayments will suddenly increase. Some people are not prepared for the increase in repayments and can find themselves in a predicament.
What options do I have?
Rest assured, you do have a few different options when the interest-only term is finished.
1. Pay Principal and Interest.
The simplest option is to revert your home loan to principal and interest. By doing this you will be paying off the mortgage on your home and thereby getting closer to owning your property. The downside is that your repayments will be higher. If you find the repayments are too high, consider looking for a lender that offers a lower interest rate. Preston Finance and Insurance in Cairns can help you find the best rate around! Preston Finance and Insurance can do all the hard work for you, by finding the best lender and home loans with the lowest rate! Preston Finance and Insurance can do all the research and negotiating with the banks to make sure you get the best deal.
2. Extend the interest-only period.
Depending on your bank, this may or may not be an option. A lot of banks are desperate to keep their customers and will try their best to accommodate their needs. If you do go ahead with this option, remember to consider how it will affect you down the track. Whilst it may be easier on your finances initially, you will still have to repay the mortgage eventually and the longer you hold off on repaying the principal, the more interest you will end up paying.
3. Refinance to another loan
If you are coming to the end of an interest-only period, now is a great time to start researching other home loans out there. Preston Finance and Insurance can assist you with this. Preston Finance and Insurance have access to a huge range of home loans and deals (well beyond what you could get as a private individual). Whether you revert to principal and interest or extend your interest-only period, it is worthwhile checking to make sure you have the best deal around. There can be significant financial benefit in finding a better home loan deal.
If you are approaching the end of the interest-only period on your loan, contact Preston Finance and Insurance. They can help you understand the range of options available to you and select the best deal for your home.
Preston Finance and Insurance
1/15 Spence St, Cairns City QLD 4870
ph 07 4052 0750