Add extra cash to your monthly budget when you secure a home loan with up to ten years interest only
Home loans with up to ten years interest-only repayments allow you to minimise your monthly repayments because you’re only paying the interest portion. This has numerous benefits to investors, as interest-only payments can be used for tax savings and to increase your cash flow. On the flip side, sometimes interest-only payments are used by owner occupiers looking to reduce their repayments for a short period of time, as interest-only payments are smaller than regular principal and interest repayments. This type of option should be used with care as you are not working off the balance (the principal) of your home loan.
An interest-only home loan is suited to investors who can further benefit on their taxes by paying high interest amounts on their investment properties. This tax saving benefit will not apply to an owner occupied property, because you’re never paying off the principal.
Comparison of home loans with up to 10 years interest-only payments
How does a home loan with up to 10 years interest-only repayments work?
With this type of loan, you are allowed the option of decreasing your regular repayment amount by not applying any funds to the principal balance.
It's important to keep in mind that you won't make any progress on your principal loan amount when you are making interest-only payments. If you were to do this consistently for the ten years that some lenders offer, the amount you owe on the home would be the same at the end of those ten years as it was in the beginning.
This is why interest-only loans are favoured by property investors, because they would only need to make minimum repayments while the property is rented out. When they finally sell the property, they can pay off the principal in full.
First home buyer blues
A first time home buyer who needs to borrow $220,000 for their home loan may be intrigued by the option of getting to make interest-only repayments for ten years. This would allow him or her the chance to use their extra funds to furnish the home and make any improvements.
What borrowers need to keep in mind is that with a home loan with up to ten years interest free on a loan amount of $350,000, that amount will remain the same even after the ten years is over. They will have built no equity during that extended period of time, possibly causing them to lose money if they wanted to try and sell the home.
|Principal and interest||Interest Only|
|Loan period||30 years||30 years|
|Interest rate||4.74% p.a.||4.74% p.a.|
|Total interest paid||$306,516.39||$497,700.00|
How to compare home loans with up to 10 years interest-only payments
- Interest rates. With this type of home loan, you will of course want to research different lenders to find one that is charging a competitive interest rate. Keep in mind that the comparison rate should also factor into this in addition to the advertised rate. The advertised rate doesn't take into account many of the fees charged in a loan, whereas the comparison rate does.
- Interest rate type. Depending on your personal preference, you will want to check if the interest rate is fixed, giving you a stable repayment amount at the end of each statement period, or if it will fluctuate with a variable interest rate. Many investors opt for a fixed rate, as this guarantees your payments will not fluctuate over the fixed term.
- Principal payments. If you your income includes occasional bonuses or commissions, you may want to check to see if you are allowed to make any repayments towards your principal during the ten year interest-only period.
- Fees. Always compare the fees that are included with any loan product. Check for application fees, annual fees and monthly charges.
- Assess your situation. As explained above, property investors tend to opt for interest-only repayments. However, if this is your residential property, you’ll need to question why you want to apply for this loan. If it's for a repayment break, be mindful that you will need to pay the principal back eventually, and that there might be better options your bank can offer instead.
Pros and cons of a home loan with up to 10 years interest-only
- Lower repayments. The main benefit of this type of home financing is the lower repayment amounts that allow you to put your money towards other items or investments.
- Reduce other debt. If you have high interest credit cards and/or personal loan commitments, you could use the money that you would normally be applying to the principal of your home loan to work that other debt down.
- Flexibility. You will have the option in many cases to make principal repayments when you have the extra funds to do so. This can be particularly helpful if your income fluctuates due to commissions or bonuses.
- 10 year time frame. Unlike many other home loans which will limit interest-only options to five years only, these loans have a much longer 10 year maximum period, meaning you can plan ahead more effectively.
- No equity. Home loans with up to ten years interest-only are not allowing you to build any equity into the property. If the value were to drop, you could actually ending up owing more to the lender than the home is worth.
- High principal balance. At the end of the interest-only period, you will still be facing the same home loan as when you started ten years earlier. You might need to find a way to reduce that balance at some point if you plan to own the property.
Things to consider about home loans with up to 10 years interest-only options
- No decrease in the principal amount. Even when you have this feature built into your home loan, you should make attempts towards paying your principal balance when you have any extra cash. It's important to remember that you will have that principal balance to contend with at some point.
- Overspending. Also avoid spending the extra money you are holding onto each month frivolously. If you are not investing it into your home, look for other ways to make it work for you.
Frequently asked questions
Will I get any tax benefits?
Only when used towards an investment property will the borrower be able to benefit from certain tax reliefs for paying interest only for up to ten years.
Can I contribute to the principal balance when I have the money?
With most lenders you should be allowed to make additional repayments that go towards your principal balance. This is an option you should look into while researching this type of loan, especially when you are receiving periodic boosts to your income.