You'll make interest only payments towards your mortgage for six months, with no impact on your credit score. You can cancel at any point, but you can only apply once. Your monthly payments will increase at the end of the reduced payment period to collect the amount you haven't paid.
Cons of interest-only loans
Higher interest rates: Interest-only loans typically come with higher interest rates compared to fully amortizing mortgages. Lenders consider these loans riskier due to the lack of principal reduction during the interest-only period.
There's a higher risk of negative equity than a repayment mortgage. The mortgage balance remains the same over the mortgage term, leaving you more exposed to changes in house prices. The total amount paid in interest over the life of an interest only mortgage will also exceed the interest paid on a repayment mortgage.
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.
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.
Interest rates don't have a direct impact on your credit scores, and an increase or decrease in your accounts' interest rates won't affect your credit scores at all. Your credit reports don't even show the interest rate on your accounts, and most credit scores depend entirely on the information in your credit report.
A typical interest only mortgage lasts between five and 25 years. It's possible to remortgage to a new deal at any time, which is often a good idea if interest rates have changed. You can also remortgage at the end of the deal – but you will need to meet affordability criteria.
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. If you're looking to buy a second home, you may want to consider an interest-only loan.
There are several different ways they could extend your mortgage, including: turning all or part of it into a repayment mortgage, with a later agreed full repayment date. letting you repay it with several agreed payments rather than just one lump sum.
This is because, in effect, you're only paying the interest charges on your mortgage loan. If someone has a short term need to preserve money, they could choose this, retain the mortgage and property and just service their interest-only loan before switching back to a repayment mortgage.
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.
After the interest-only period, you have the option to refinance, pay a lump sum, or begin paying down the principal. However, it's important to note that your monthly payments will increase significantly once you start paying both the principal and the interest.
You can choose to only pay the interest on your mortgage for 6 months. We'll work out the amount you need to pay based on your interest rate and balance. Your payments will then be fixed at that amount for 6 months. Your mortgage balance won't go down while you're only paying the interest.
Interest-only loans are most commonly used for mortgages. For example, if you borrow $400,000 at a rate of 6% for 30 years, your monthly interest payment would be $1,919.50 and your monthly principal payment would be $478.70.
Credit card inactivity will eventually result in your account being closed. A closed account can have a negative impact on your credit score, so consider keeping your cards open and active whenever possible.
As always, it's a good idea to run this past your accountant first. 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 want a monthly payment on your mortgage that's lower than what you can get on a fixed-rate loan, you might be enticed by an interest-only mortgage. By not making principal payments for several years at the beginning of your loan term, you'll have better monthly cash flow.
Interest only repayments are generally lower than principal and interest repayments, so it can be a good short-term option if you have other things you need cash for, such as renovations or a holiday. For more information on how repayments work, contact us at ANZ.
No Equity Growth: Interest-only mortgages generally require large down payments, so lenders have collateral against default. But for the first 5-to-10 years, the homeowner's equity doesn't grow at all, unless you make extra payments. If your goal is paying down a mortgage, interest-only loans are a bad place to start.
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.
Many lenders will approve a temporary change from a regular (capital and interest) repayment plan to an interest-only one. This shift would allow you to drop the capital repayment and cover only the interest.
Suppose you use the 0 percent intro APR period to run up higher balances than usual. In that case, you might end up with a high credit utilization ratio that hurts your credit score.
It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.