Interest only is exactly what it says it is: it’s a loan product that allows you to repay the interest accrued on the loan. During an interest only period, you don’t pay off any of the principal loan amount.
The main benefit of an interest only loan is that your repayments are lower, however, in the vast majority of cases, over the life of your loan you will end up paying more.
Interest only may be suitable for investment loans however, they are not common for owner occupier loans and there are some banks that don’t allow interest only on owner occupier properties at all.
The most popular interest only period is usually five years and at the end of that time your loan will revert to interest and principal repayments. At this point your mortgage repayments will increase.
Some banks are tightening up the length of time you can have a loan on interest only, which can affect people with rental properties if they are dependant on the rent covering the mortgage. Be careful to ask the bank – or your broker – before you commit to interest only, so you can plan well in advance.
Before you enter into an interest only arrangement, ask yourself these questions.
When the interest only period expires, can I afford a higher repayment?
Am I in a position where I won’t need to dip into my offset account?
Are the short term benefits more valuable to me than the long term costs?
Sometimes when an interest only loan expires, it’s the first time in years that you will actually look at your loan package. It’s always a good time to review your mortgage and if it’s time to restructure, your mortgage broker can help guide you in the right direction.