how interest only home loans can be used for property investment
22 April 2011
Interest only home loans are ideal for those seeking to purchase an investment property. The difference between interest only home loans and standard home loans is that the regular monthly repayments are for the interest only with the agreed principal paid at the very end of the loan period.
Interest only loans do not include regular repayments on the principle of the house. The principle value of the property is settled at the duration of the loan (usually within two to five years as the investor is speculating that the sale of the property at the end of the loan will be significantly higher than the original principle) It is widely acknowledged as the investor’s option as the cost of a property acquisition can be deferred to a later date, meaning investors can snap up that real-estate bargain without being tied to a mortgage that costs a fortune. And when it does come to settling the original principle, the sale of the property is expected to be higher. This is a basic buy, hold and sell strategy.
Interest only home loans are becoming increasingly popular among home owners who desire to lower their repayments for a while, or for those wanting to purchase a property of slightly higher value than they are currently able to.
When it comes to buying a property, an interest only home loan can be used as a way of freeing up cash in the short term. If you’ve found a property that could potentially give you a higher rate of return than your home loan, then this could be a very intelligent move. The money saved by having low repayments can be offset in the long run at the end of the interest only mortgage term.
However, if you are looking at purchasing a property for the first time and an interest only loan is the only way you can see yourself being able to afford the repayments, then this may not be a wise move. Equally, if you are planning on using the extra money to pay off other bills, or take a holiday, then this isn’t a wise move either. Interest only home loans should really only be considered if you know that at the end of the term you will be in a position to pay back the principle cost.
With an interest only home loan it’s extremely important to purchase property that increases in value sufficient enough to cover mortgage and holding costs. The stability of an interest only home loan makes budgeting easy (when you’ve opted for a fixed rate interest only loan that is). This can be especially helpful for those holding the property while they do work on it. For example, if you have purchased land with the intention of building a property, paying the rent/mortgage on your current dwelling and a full standard loan (principle and interest) on the new loan, is financially very straining. However, paying the interest only on the new property, gives you the financial freedom to finish/renovate it. Holding on to this property while you work on it therefore becomes a wise investment. A couple of things to remember is to avoid loans which may come with monthly account fees and to try and get your wages paid into the loan account to reduce the amount of total interest you will pay.
Once it comes to the selling a property that you have an interest only mortgage on you should hopefully be left in the position where the property is making you a tidy profit. If you have been making renovations and the housing market has gone up, then in theory you should take away a decent sum of money after repaying the initial cost. However, some people choose not to sell and refinance the loan in order to turn it into a long term investment.
There is also a risk here that at the end of the loan term, the housing market has fallen and the value of the house is not worth as much as the original loan. This is what’s known as negative equity.
Bankwest offers Interest-Rate only Home Loans. where conditions apply
Important things you should know: Lending criteria, fees and charges apply. Terms and conditions apply and are available on request.