Disadvantages of an Interest-Only Mortgage
Interest-only mortgages are high risk - get it wrong and you can be stuck with an expensive loan that costs more than you get in return. If circumstances change before the term expires and these affect your ability to re-mortgage, things can get messy.
While interest-only repayments are lower during the interest-only period, you'll end up paying more interest over the life of the loan. There are also risks involved with getting an interest-only repayment loan.
If you're interested in keeping your month-to-month housing costs low, an interest-only loan may be a good option. Common candidates for an interest-only mortgage are people who aren't looking to own a home for the long-term — they may be frequent movers or are purchasing the home as a short-term investment.
During the interest only period, you're required to repay the interest only, but not any of the principal. However when the interest only period expires, you will automatically be moved to principal and interest repayments, which usually means your repayments will increase as you will now be paying both.
An interest-only mortgage allows borrowers to reduce their repayments in time of need or may enable property investors, to claim tax benefits*, as the total interest repayment may be tax-deductible.
Interest-only repayments are available for a set period over the life of the loan. Up to 5 years on an Owner-occupied loan and 10 years on an Investment loan. Principal and interest repayments following an interest-only period will be higher than if you'd been paying both the principal and interest from the start.
Cons of interest-only loans
Lenders consider these loans riskier due to the lack of principal reduction during the interest-only period. Payment shock: Once the interest-only period ends, the monthly payments will increase as you start paying both principal and interest.
Interest-only mortgages can seem more affordable, but they tend to cost more overall; you'll also need to find a way to pay off the loan at the end of the term. Repayment mortgages cost more per month but less over the loan's lifetime - and will pay off your mortgage in full.
Lower repayments: The temporary lower repayments of an interest-only loan can free up money for other expenses like renovations or paying off other outstanding debts. Investment Strategy: Interest-only loans are great for investors who plan to profit by selling their properties within the IO period (eg.
You can switch between repayment options during the life of your loan, however there are limits on how long you can have an Interest Only period. Interest Only payments are not available within the last 5 years of your contracted loan term.
Interest rates can be seen as 'good' or 'bad' depending on your perspective. For borrowers, lower rates are generally better. They make loans more affordable. For savers and investors, higher rates are usually more desirable.
The lender will make an assessment based on your permitted income and expenditure. Other factors such as the number of dependents you may have will also be considered. Arranging your mortgage on interest-only will not necessarily mean you will be able to borrow more.
The interest rate could be higher than on a principal and interest loan. So you pay more over the life of the loan. You pay nothing off the principal during the interest-only period, so the amount borrowed doesn't reduce. Your repayments will increase after the interest-only period, which may not be affordable.
Negative interest rates are a form of monetary policy that sees interest rates fall below 0%. Central banks and regulators use this unusual policy tool when there are strong signs of deflation. Borrowers are credited interest instead of paying interest to lenders in a negative interest rate environment.
The Old Testament "condemns the practice of charging interest on a poor person because a loan should be an act of compassion and taking care of one's neighbor"; it teaches that "making a profit off a loan from a poor person is exploiting that person (Exodus 22:25–27)." Similarly, charging of interest (Hebrew: נֶֽשֶׁךְ, ...
Repayment plans based on your income are a smart choice to lower your payment. For example, payments on the Saving on a Valuable Education (SAVE) Plan are no more than 10% of your discretionary income. The lower your income—or the larger your family size—the less you'll pay each month.
Earnings on Savings: Higher interest rates can benefit your savings. When you deposit money in savings accounts, or other interest-bearing accounts, you can earn more on your savings, which can help your money grow faster.
While it's generally best to pay off your credit card balance in full every month to avoid paying interest, doing so isn't always realistic.
Benefits of an interest-only mortgage
The most obvious benefit of an interest-only mortgage is that monthly payments are initially considerably lower than of typical loans. These loans allow the borrower to make larger purchases that they would otherwise only be able to afford a few years down.
Important things to consider
There are limits to how long you can have interest only periods – the maximum interest only period at any one time is five years for owner occupiers and 10 years for investors (credit criteria applies). Interest only is not available in the last five years of your loan.
Finally, the interest rate on principal and interest repayment loans is usually lower than on interest-only loans, which again reduces the amount of interest you'll pay over the life of the loan. In short, principal and interest repayment home loans are more cost-effective than the alternative.
The bank won't give you an interest only loan forever. Generally, the bank will approve an interest only mortgage for up to 5 years. So once you get to the end of your interest only period, you need to apply for another interest only period. But each bank has different policies.
An interest-only retirement allows retirees to live off the interest generated by their investments without touching their principal savings. Sounds pretty good, right? However, this approach requires careful planning and a sizable portfolio to generate sufficient returns.
You can switch between Principal and Interest repayment and Interest Only payment options during the life of your loan. However, there are limits for how long you can have Interest Only periods. These limits apply when you request a new or extended Interest Only payment.