Interest only loans and property investment: How does that work?

As a mortgage broker, we’re often asked about how interest only loans might work in connection with investment property. Let’s take a look at how that might work for a mortgage in Australia.

The Two Main Types of Mortgage

In the Australian property market there are two main types of mortgage. The first, is a principal and interest (P & I) loan. That’s a mortgage where the amount that you borrow is paid off in installments alongside the interest that you owe. When you finish the mortgage term, you own the property outright and the lender no longer has any interest in the property.

There is also the interest only loan. This kind of mortgage sees you repay only the interest on the loan. When the mortgage term finishes; you still owe the lender the original sum of money that they lent you. If you don’t pay them the money, they retain their interest in the property until it is sold to pay the debt.

Why Would I Choose An Interest Only Loan For My Investment Property?

It’s important to acknowledge that interest only loans are not always the best solution for either investing or for buying your own home. The fact that you may come to the end of a mortgage term and still owe the original amount can be off putting but there are, however, advantages to this form of mortgage too.

Let’s say you’re trying to obtain a mortgage in Australia for an investment property; here are some reasons that you might choose an interest free option:

• Lower repayments compared to a P & I loan mean that you could be cash flow neutral or positive, i.e. the rental payment is enough to cover the interest repayment and other costs involved in maintaining the investment property.
• Tax breaks on interest payments mean that investors can find themselves profiting from interest only loans through a reduction in the income tax that they pay
• The increase in equity value in a property may provide a profit in its own right

That last one is the reason that many investors like interest only mortgages. They don’t intend to keep the property for the lifetime of a long mortgage. They use the interest only mortgage to make a house purchase more cheaply than a P & I mortgage would allow them to and then they wait for the value of their property to rise. When they sell the property, they pay off the outstanding mortgage and keep the additional equity as profit.

How Do I Tell Which Type Of Mortgage Is Best For Me?

If you’re looking for an investment property loan, a mortgage broker is a good place to start. Here at Aspirus Financial Services we can look at your particular circumstances and try and devise a mortgage that works better to bring about the results you want to achieve with your investment.

We can access over thousands of loan types from a wide-range of financial institutions – something your bank can’t do – and that means a tailored approach to a mortgage whether it is interest only or P & I. Find out more by contacting us today.