Most people would rather buy a home sooner rather than later.
There is nothing wrong with renting and some may prefer it but it also means paying off someone else’s mortgage. Perhaps the biggest factor preventing more people from buying a home is the financial aspect. Even saving for a down deposit can easily take years, if not longer.
Interest-only mortgages then appear as an attractive option for those with budget constraints. But as with any type of loan, you need to first carefully weigh the pros and cons before making a decision.
What is an Interest-Only Mortgage?
These mortgages are exactly what they sound like.
The borrower only pays interest on the mortgage instead of both the interest and principal. Terms are typically between 5 to 7 years, making them particularly attractive for property investors as the interest can be claimed as a tax deduction.
Interest-only mortgages may sound appealing because of the lower monthly repayment. But they are not always ideal as the borrower ends up paying more in interest in the long run. This is because less of the principal is paid off.
Who is Best Suited for an Interest-Only Loan?
Interest-only loans are not a suitable option for everyone. They can be ideal for specific individuals and circumstances.
Interest-only loans allow property investors to reduce their monthly repayments, freeing up cash for other investments or expenses. This strategy can be particularly beneficial if the property is expected to appreciate in value.
Individuals with variable or seasonal income, such as freelancers, commission-based workers, or business owners, may find the lower repayments during the interest-only period easier to manage.
Short-term property holders planning to sell the property within a few years may prefer interest-only loans, as they won’t be tied to higher repayments for the principal.
High-income earners who are confident in managing their finances and want to allocate funds elsewhere, like investments or paying off higher-interest debt, can benefit from the flexibility.
Why Are Interest-Only Loans Better Than Principal & Interest Loans for the Right Individual?
Interest-only loans offer significantly reduced monthly repayments during the interest-only period, easing short-term financial strain or allowing for higher savings.
The flexibility of lower initial repayments allows investors to redirect the saved cash flow into other income-generating investments, potentially creating additional wealth streams.
For investment properties, the interest repayments may be tax-deductible, making this type of loan attractive for investors seeking to maximise tax efficiency.
For property investors banking on long-term capital growth, an interest-only loan enables them to keep their repayments low while waiting for the property’s value to increase.
Pros of Interest-Only Mortgages
Is an interest-only mortgage right for you? The answer to that ultimately depends on your homeownership goals and your financial situation. Here are some of the benefits of interest-only mortgages:
Lower monthly repayments: Because you are only paying the interest component on the loan, monthly repayments are considerably lower. This is particularly attractive for first home buyers who may already have budget constraints.
Tax deductions: Interest-only loans are appealing for property investors as the interest paid is a tax deduction. Investors typically take out these types of loans with the expectation that properties will appreciate in value before paying the principal.
More cash: Lower payments frees up extra cash which can be put towards home renovations or even into a business.
