Minimise your repayments and maximise your cash flow with an interest-only home loan
Standard home loans have repayments that include both the interest and a small proportion of the principal. If you remove this principal portion from the equation, you can reduce the amount you make in repayments each month. This can be good for some borrowers, including investors and those building a property, but it should be noted that making interest-only payments doesn't reduce your loan amount, so care should be taken when using an interest-only loan.
Some of the loans below feature interest-only repayments. The rate advertised might not be reflective of the interest-only rate.
HSBC Home Value Loan - Resident Owner Occupier only
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Interest-only home loans comparison
Rates last updated December 11th, 2016.
- ME Bank Flexible Home Loan Fixed - 3 Year Fixed Rate (Owner Occupier)
Interest rate now 3.69%
September 2nd, 2016
- HSBC Home Value Loan - Resident Owner Occupier only
Application fee waived for Resident Owner Occupier only.
September 19th, 2016
- UBank UHomeLoan Variable Rate - Real Reward Offer (Owner Occupier Interest Only)
Comparative rate increases by 0.10% | Interest rate increases by 0.10%
December 2nd, 2016
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Compare interest-only home loans for December 2016
|Home loan||Interest rate||Comparison rate|
|Australian Unity Kick Starter Home Loan||3.79% p.a.||3.82% p.a.|
|ME Bank Flexible Home Loan Fixed - 3 Year Fixed Rate (Owner Occupier)||3.84% p.a.||4.66% p.a.|
|IMB Budget Home Loan - LVR <80% (Owner Occupier)||3.87% p.a.||3.92% p.a.|
|ClickLoans The Online Home Loan Interest Only||3.99% p.a.||3.99% p.a.|
Interest-only home loans explained
Here the industry experts (listed below) share some thoughts around interest-only loans:
Click here for video transcript:
Carla Baldock: An interest-only loan is where your monthly repayments only pay back the interest on the loan that you've taken out. So, in other words, at the end of the loan, home loan period, typically 30 years, your balance of your home loan is still due. All you've paid is the interest on
Stuart Tucker: Interest-only loans are often used sometimes for investors, who just want to be able to measure the interest component of that loan, and also for people in the early term of their, say 25 year loan period, just to give them a kick start, and then after a period of time, start paying down principal and interest.
Kim Wight: With interest-only loans, they're predominantly for the investor, because when people are buying an investment property, they're doing it (1) for capital growth, and (2) for being able to get a tax advantage in negative gearing. And the only, the portion that is a tax advantage is the interest rate.
Neil Manuel: So the main benefit of an interest-only loan is that the balance actually doesn't get reduced. You're only paying the monthly interest on a loan. Why is that important, is because on an investment property, you can claim more back from your interest payments when the balance of the loan is actually higher. So the lower you bring the balance down, the less you are able to claim back, because you're being charged less interest.
About interest-only loans
Interest-only home loans are loans that only require you to pay the interest portion of the repayments. This means you pay less each month than a regular principal and interest loan.
For many, it’s an option that requires financial discipline and looking for a short term solution.
"When we recommend an interest-only, variable rate product, we are referring to the minimum repayment amount as the interest component," says Andrew Tan, co-founder of Masters Broker Group*. "Care needs to be taken, and it is important that borrowers understand the key difference between a principal and interest repayment and an interest-only repayment. A borrower making an interest-only repayment must not develop the mindset that they are meeting their entire borrowing commitments, as no principal repayments have been made."Back to top
Who are interest-only loans suited to?
If the home loan doesn’t stretch your finances, then an interest-only loan could be suitable. According to Mr Tan, borrowers that are good with money could benefit from the flexibility that an interest-only loan could provide because it "allows the borrower to pay more than the interest, allowing the borrower to make principal repayments even when the loan is interest-only. This is great to manage cash flow and provides options for the borrower".
There are also other perks associated with an interest-only loan if you have the right financial advice.
"When used with tax planning, the borrower can keep the repayments on an investment loan at the minimum amount, and direct additional funds to non-tax deductible borrowings, like a home loan," explains Mr Tan.
Interest-only loans are suited mainly to investors. Investors will usually use interest-only loans to purchase a property and make minimal repayments.
"Depending on their investment strategy, most investors would use an interest-only loan," says Mr. Tan. "Because of the flexibility and lower repayments, most investors would employ an interest-only loan for the purchase of investments such as shares and property."
But Mr Tan says investors aren’t the only ones who can reap the benefits of an interest-only loan. Owner occupiers can also use the loan if they’re building their own home, renovating an existing home or need to free up some cash.
"In particular circumstances, lenders may also allow borrowers to temporarily change their repayment schedule from a principal and interest repayment to an interest-only repayment for a short time. This could occur for instance when borrowers go from two incomes to one income, due to maternity leave."Back to top
What's the best interest-only home loan?
There's no one best interest-only home loan, as our circumstances are all different. There are different ways you can find out if a home loan is the right one for you. These include comparing one or more of the following:
- Fees. You might be looking for an interest-only home mortgage with low upfront and ongoing fees.
- Interest rates. Interest rates are slightly more important when comparing interest-only home loans as there's no principal which makes up part of the repayment, meaning the full amount of your interest repayments will rely on the interest rate you're paying.
- Features. Many borrowers opting for interest-only home loans also opt for 100% offset accounts, as they can be used to realise tax savings. Other features such as the ability to make extra repayments, bring your loan with you to a new property, or split your loan into fixed and variable portions might be important.
What are the risks of interest-only loans?
Industry experts reveal the risks of interest-only home loans.
Key points to consider
- Another consideration of this loan type is if the borrower has continued to make the minimum interest-only repayments and hence not contributed anything towards the principal loan amount, they will not have built up any equity to access for other means, unless the property has increased in value.
- Interest-only loans are popular among investors. This is generally because the interest on a loan may be tax deductible depending on your personal situation. This is referred to as negative gearing. However, this type of loan is now appealing to many owner-occupiers who are attracted to the prospect of lower loan repayments during the first few years of their loan. However, as the interest on an owner-occupied property loan is not tax deductible, it’s generally better to pay this down as quickly as possible. In saying this though, there are cases where interest-only loans for owner-occupied properties may be appropriate as part of an overall financial strategy, for example when using the extra funds elsewhere such as paying down more expensive debts, or using the funds for renovations instead of borrowing additional money.
- The main risk of an interest-only loan is that you are not required to make any repayments on the principal loan amount. Over the long term, the balance of the loan will remain high and as a result, the interest requirements will be higher.
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Should I split my interest-only home loan?
A split rate home loan will see your home loan split into different portions. These portions can be fixed for different periods of time like a regular fixed rate home loan or left as variable rates. The benefit of this is that you can get some of the advantage of a variable rate home loan, such as interest rates which can decrease over the course of a year, with some of the advantages of a fixed rate home loan, like protecting yourself from rising rates.
Note that some home loans will only allow for two splits e.g they allow you to split the loan into two portions. Others allow you to split your loan into as many as five or even six portions.Back to top
Interest-only home loans pros and cons
As mentioned above, there are a few considerations involved with interest rates, and a number of advantages.*Disclaimer: The article is for general information purposes only. The use of interest-only loans should be considered in the context of your overall investment strategy, financial situation and needs. You should, before acting on this, consider its appropriateness to your circumstances.