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Interest only home loans

Interest-only home loans are loans that only require you to pay the interest portion of the repayments. This means you pay less each month than a regular principal and interest loan. For many, it’s an option that requires financial discipline and looking for a short term solution.

Potential benefits of an interest-only mortgage

Lower monthly repayments

Because you are paying only the interest component on your home loan, your monthly repayment will be comparatively lower. As an example and based on a home loan interest rate of 5%, the monthly repayment on a $300,000 mortgage over 25 years would be approximately $1,754 per month. If you were making interest-only payments, the monthly cost would be approximately $1,250 per month.

Can help maximize tax deductions

An interest only home loan generally presents potential benefits to investors. If the interest paid on the home loan is a tax deduction for the investor, then paying interest-only enables the investor to maximize that deduction. After all, paying off the principal means that interest would be charged on a smaller amount. This in turn reduces the dollar amount of the tax deduction.

An investor may take out an interest-only mortgage on a property, and count on appreciation of the property to pay the principle at the end of the term.

Can free up cash to allocate to other more important goals

In the investor example above, paying interest only (with the interest being tax deductible) would free up extra cash to put towards, for example a loan that isn’t tax deductible. Or free up cash to put towards business running expenses, or the cost of studying. There are plenty of other goals that can improve our wealth over the long term to which extra cash could be apportioned.

Who is Suitable for an Interest Only Home Loan?

In the past, investment property buyers predominantly used these loans, but they’re becoming increasingly attractive to those wishing to purchase a more expensive home, or who already have a large mortgage, as paying only the interest on a large mortgage will save you a lot more money. Also, if you’re only planning on hanging on to your property for a few years before flipping it, this type of loan can be beneficial.