Interest only loans

Discover the benefits and pitfalls

With an interest only loan you only pay interest on your borrowings for a set period (most often up to five years). After this time your loan will revert to a standard principal and interest mortgage, and you’ll start paying back both principal and interest. In some situations an interest only mortgage can be a great idea, but there are certainly disadvantages as well. Your ITP Home Loans advisor is eminently qualified to help you decide whether an interest only loan is right for you.

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Would interest only suit you?

An interest only mortgage is particularly suitable for the short term, if you want to free up money that would be spent on principal repayments for other things. For example:

  • If you invest these extra funds into a financial product with a solid high interest return
  • If you’re renovating or building. If you’re having to rent during the course of construction, for example, a short term interest only loan can help you over the hump of having to pay both building costs and rent
  • If your income fluctuates from month to month, you may be better off paying interest only
  • If you’re a property investor taking advantage of negative gearing for tax purposes

Take a look at our interest only calculator to find out the differences in your repayments for interest only and standard loan types.

What are the negatives?

An interest only loan is definitely not suitable if you’re needing extra funds for everyday living expenses, or as a temporary solution in times of financial difficulty. Going down this path will probably only make you worse off in the end. Here are the main disadvantages of interest only:

  • Although your repayments will be less during the term of the loan, an interest only loan will cost you a lot more in the long run. Paying interest only means you don’t lessen the amount of money you owe, so over the whole loan you’ll end up paying more interest. You’ll also have to pay higher repayments at the end of the interest only term.
  • You’ll have less time to repay the principal when the interest only term ends
  • Interest rates are most often higher than on standard fixed rate loans. They’re also usually variable, so your repayments will go up if interest rates rise.
  • Very importantly, because you’re not actually paying off your mortgage, you’re not building equity in your home. You won’t be able to borrow against this equity.
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Interest only combined with an offset account

Putting extra payments into an offset account will reduce your loan repayments, but for this method to work it’s vital you maintain these repayments and not make any withdrawals.

Get in touch with ITP today

Deciding on whether an interest only loan is right for you can be difficult, so talk to a qualified ITP home loans broker today on the most suitable home loan for you. You can email us, or make an appointment to see an advisor face to face. Alternatively, give our helpful ITP Home Loans consultants a call today on 1300 387 487.