10 Jun Pros and cons of an interest only loan
If you’ve been following the news lately then you would have seen some articles about banks cracking down on interest only loans. An interest only loan is a mortgage that allows a borrower to only pay the interest on their loan for a period of time before they start paying the principal. It may be the first five years of the term where they only pay the interest and then after that period they start paying the principal. As you would expect with any loan, there are pros and cons that need to be considered prior to taking out the loan.
CONS: The banks have cracked down on them
Generally speaking, banks charge lower interest rates than other lenders. Although rates can be comparative, non bank lenders have higher exit fees than banks, so because there’s been a crack down on banks allowing interest only loans, borrowers may pay more for the convenience of such an arrangement if they want to exit before the loan term is over. Borrowers also need to be aware that when they take out a loan with a non bank lender there won’t be as much scrutiny. Bank lenders tend to be more heavily regulated than non bank lenders, so if the arrangement turned sour, it would be hard to get restitution.
CONS: You may not be able to afford interest and principal
When the loan reverts to interest and principal you may find that the increase in repayments is harder to afford than when you were just paying interest. You do have options available though. You could either get a second job to cope with the payments, or you could contact your lender to refinance (it’s worth talking to one of our friendly brokers too if you’d like some advice). That could put you in a tricky position. You could also be in a tricky position if interest rates were to rise. When you take out a loan, it’s always good to allow some cushioning for if interest rates do rise.
PROS: It’s easier to get a loan with a non bank lender
Non bank lenders aren’t as heavily regulated as bank lenders, which means that they can lend to people who wouldn’t otherwise get a loan. For example, if you want to take out an interest only loan and can only put down a small deposit, the loan is more likely to be approved if you go through a non bank lender. That means you will build up your property portfolio much quicker which is excellent if you are an investor.
PROS: Your repayments will be lower
When you take out an interest only loan, your repayments will be lower than if you take out a loan where you pay interest and principal. Lower repayments means that if the property you’re purchasing is an investment, you will be able to afford renovations more easily than if you were paying the interest and the principal. Lower repayments could help you get on the property ladder faster if you’re using an interest only loan for your first property.
PROS: You can invest money that would otherwise go in repayments
If you were to pay principal and interest your repayments would be higher and although you are paying off an asset, it may not be the best use of your money. When you choose an interest only loan you’re freeing up funds for other investments such as shares, business, or even another property. It’s potentially a better use of your money.
If you need a loan to get things moving, call us +61 488 814 148 and let’s talk about your options.