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As a property investor, getting an interest-only investment loan can help you build your wealth while minimising your costs. Learn how these loans work and, just as importantly, how to use them in your favour. On this page you can review the risks of interest-only loans, learn why investors choose these loans over principal and interest mortgages and compare the most competitive interest-only deals in the market.
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Apply for the UBank UHomeLoan - 1 Year Fixed Rate (Investor, IO) and enjoy a home loan with the ability to make extra payments, as well as split facility up to four times. You can borrow up to 80% of your home loan value.
The loans below have interest-only repayments. However, the repayment calculation shows principal and interest repayments. Your initial repayments will be lower.
After entering your details a mortgage broker from Aussie will call you. They will discuss your situation and help you find a suitable loan.
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Australian home loans can be used to buy your own home or to buy a property as an investment. Most loans are principal and interest loans, meaning you borrow money and repay it, plus interest.
An interest-only investment loan is an investment mortgage that allows you to repay only the interest portion for a set period, usually up to five years. After that period you have to start repaying the money you actually borrowed, with interest charged on top.
With an interest-only investment loan your monthly repayments start smaller. Why? Because you're not repaying the money you've borrowed (the principal). You're just paying the interest on top.
It saves you money in the short term but can cost you more in the long term, because you may end up paying more interest over time. If used strategically, an interest-only investor mortgage can help you minimise your tax and mortgage repayments.
Learn more about how interest-only repayments work
It's a good idea to consider the risk or negatives when making any financial decision – then you're able to balance out the pros with the cons to make the right decision for you. Interest-only loans have a few possible drawbacks:
None of this means interest-only loans are inherently bad or risky. You just need to be aware of the potential downsides and make sure your investment strategy suits your loan type. Getting expert help from a mortgage broker is a good idea if you're confused about interest-only investment loans.
There are several reasons why investors use interest-only investment loans:
Property investors can use interest-only loans to reduce their tax bill, because home loan interest is tax-deductible for investors. At the end of the financial year, you can deduct all of the interest you’ve paid on your investment property (along with a number of other tax-deductible property expenses) over the past 12 months.
Payments on the loan principal are not tax-deductible, which is why many investors favour an interest-only loan, as the extra money you would have paid towards the loan balance (in a traditional principal and interest loan) can be used elsewhere: perhaps towards another investment or to pay down your own home loan, which is not tax-deductible at all.
If you’re a property investor using an interest-only home loan, you’ll be able to deduct your entire home loan repayment from your taxes.
Interest-only investment home loans can be a particularly effective strategy when you factor in negative gearing, which can give you access to tax-related refunds and therefore better cash flow.
Negative gearing is a tax concession that allows you to offset any losses you make on your investment property against your personal income. For example, if your property costs you $3,000 per month to own and maintain and the rental income is $2,500, then you can claim the $500 difference on your personal tax.
This gives you what is known is better cash flow, as you can enjoy these tax refunds while you wait for the property to appreciate in value. The idea is to eventually sell the property for a capital gain, while minimising the cost of holding the property along the way; if you can keep the costs low enough, you may be able to buy more than one investment property, which allows you to compound the impact of your results. Which leads us to our next point...
Some investors buy property with a high-growth strategy by choosing properties and locations they believe will grow quickly in value. Rather than holding the property for many years, renting it out and paying it off over time, these investors buy the property, minimise their repayments for a few years, then sell the property for a much greater amount than they paid.
For this strategy to work, an interest-only investment loan is essential because your repayments are much smaller at first.
A more conservative investment strategy is to buy a property, hold onto it for a long time and rent it out. Over time the value of the property will hopefully grow. With this strategy you may want to repay the loan as fast as possible using rental payments and your own money. With this strategy, a principal and interest investment loan is usually the better choice.
Cam McLellan is a property investment specialist, the co-CEO of OpenCorp and the bestselling author of My four-year-old the property investor.
"A key to building wealth is to hold the greatest value of assets, using the least amount of your own money. This is where interest-only loans come into play, as they can free up your cash flow. You are able to use that money to hold additional properties and this provides compound growth on your asset base. You are then able to grow wealth faster.
I'll use an end goal example of someone wanting to pay their own home off in 10 years and not 30 years, which is the time it would take if they were to pay off a principal and interest loan using their job earnings only.
To pay off your own home in a third of the time, you are required to also buy two well-chosen investment properties. Let's say each investment property costs $600,000 and has 100% debt; banks won't lend at 100%, but for simplicity, we'll use these figures (in real life, your debt would be lower and so these are "worst-case" scenarios).
Remember, improved cash flow from interest-only loans, tax breaks and rental income will help you pay for most of your loan repayments. We'll assume the remaining mortgage on your home is also $600,000.
Well-chosen property has the potential to double in value around every 10 years. Given this, to be debt-free you need to hold the investment properties through one full growth cycle of 10 years, then sell them.
This means your two investment properties will double in value from $1.2m to $2.4m during the cycle. If you sell them at this point for $2.4m, you incur capital gains tax (CGT) on half the profit (as you held the properties for more than a year). This will cost you around $300k at the top tax bracket.
The remaining amount is $2.1m. You can now fully repay the $1.8m debt on the investment properties and your home, leaving you with $300,000 extra and a fully paid-off home. I'm sure you'll think of something to do with the extra money!"
Need expert help? Contact a mortgage broker
When comparing interest-only mortgages for investment, you need to consider these factors:
Use the calculator below to find out what your repayment will be if you choose an interest-only home loan. Then run the same calculations for principal and interest repayments so you can see what your repayments will be once the interest-only period ends. You’ll need to pay attention to both repayment figures and determine if you’ll be able to service the new repayments once your interest-only period ends.
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