Is an interest-only loan a sensible option?

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Is an interest-only loan a sensible option?

With interest rates at historical lows, interest-only loans may sound more appealing than ever because they offer the opportunity to enter the property market with lower repayments. In saying that, care must be taken, because interest-only loan repayments do not pay down the actual purchase price of the property or reflect a realistic repayment on a standard mortgage.

It is important to know that the principal amount borrowed will not reduce unless the borrower chooses to make extra repayments, assuming that this is allowed under the loan terms. As a result of this the interest-only loan may cost the borrower more over the full term of the loan.

By only paying the interest on your loan you will be unable to grow the equity in your property over that period.

For an interest-only loan to be part of an effective property investment plan, borrowers must be comfortable that a property’s value will increase substantially. If the value doesn’t increase by more than the interest paid, they may end up losing out on the equity front.

Eventually, interest rates will rise again as the market ebbs and flows and, once a loan reverts to principal-and-interest repayments, borrowers who are unprepared may find themselves in a financial struggle.

The borrower needs to make sure that they understand the implications of an interest only loan and ensure that they are planning for the future when taking on this particular product type.

Need help to understand your borrowing options? Is an interest only option right for you? Call Chris on 0490 075 039 or send an enquiry to info@chardon.com.au