Have you heard the term interest only mortgage but aren’t sure what it means? Or maybe you’ve found yourself asking— should I get an interest only mortgage?
If you said yes to any of these questions, I am here to help you.
In this article, I will help you understand what an interest only mortgage is, how it works, and what advantages you can gain from it.
What Is An Interest Only Mortgage?
Essentially, an interest only mortgage allows the borrower to pay just the interest on the loan each month. You do not have to repay the amount that you have borrowed until the end of the term. Usually, this results in cheaper monthly payments. However, it means that at the end of the interest-only period, you will still owe the full amount borrowed from the lender.
How Do Interest-Only Mortgages Work?
For all intents and purposes, interest only mortgages are structured like traditional mortgages. The key difference is in the interest only repayment period.
With an interest only mortgage, the payment time frame can last one to ten years. During this time, the mortgage loan borrower only pays the interest on the loan, resulting in cheaper monthly payments. Meanwhile, the mortgage principal remains unpaid.
Who Should Consider an Interest-Only Loan?
Have you recently found yourself wondering, ‘should I get an interest only mortgage?’
If you aren’t sure whether or not an interest only loan is right for you, here are some factors that you should consider.
You may consider an interest only mortgage if you:
- are a property investor;
- want to cut your mortgage payments for a fixed time;
- need more cash flow to invest in bonds, stocks, and other investments; and
- want the initial payments to be cheaper, and you have the confidence that you can deal with a large payment increase in the future.
Pros and Cons of Interest-Only Loans
If you’ve been asking yourself, “should I get an interest only mortgage?”, you might have also found yourself asking, “What are the pros and cons of getting an interest only mortgage?”
To help you make a decision, I list down some of its pros and cons:
Pros
The advantages of having an interest only mortgage loan include:
- If you’re an investor, it will minimize cash flow and improve tax deductibility
- Cheaper monthly payments during the term
- You can spend your extra money on other investments to build your net worth
Cons
An interest only mortgage has its disadvantages as well, including:
- The equity in your home won’t increase over the mortgage period because you’re not actually paying it off.
- Your income may not grow as quickly as you initially projected.
- You may finish your interest only payment period only to find out that your loan repayments have gone up massively. This is because you now have to repay the home loan in a shorter period of time. The sudden jump in repayments can put you into trouble.
The Bottom Line
In some circumstances, an interest only mortgage can be beneficial for borrowers. However, it needs to be done as a part of some sort of strategy. Simply requesting interest only because you would struggle to meet repayments to begin with is not responsible thinking.
My suggestion is to engage with your financial professions – your Accountant, Financial Planner or Mortgage Broker to discuss if this is appropriate for you.
Are you still wondering to yourself, should I get an interest-only mortgage? If you need expert advice, don’t hesitate to send me a message at [email protected]. I look forward to hearing from you!
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Will Bell Mortgage Broker is a mortgage and finance broker based in Melbourne specializing in residential home loans. Will is all about the average Australian understanding just enough of the broader economy to take action on your own personal economy. He is the host of the My Personal Economy Podcast which you can check out here.
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