Interest-only mortgages offer attractive benefits, such as lower monthly payments and increased cash flow for investments. However, they also come with significant risks, including the need for a large lump-sum payment at the end of the term and limited availability.
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.
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.
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.
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.
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.
Can I get an interest only mortgage? Interest only mortgages are available for home buyers, although they're not as common as repayment mortgages. To get one, you'll need a plan in place to repay what you owe when the mortgage ends. As with any other mortgage, whether you're approved is at the lender's discretion.
If you want to make principal payments during the interest-only period, you can, but that's not a requirement of the loan. You'll usually see interest-only loans structured as 3/1, 5/1, 7/1, or 10/1 adjustable-rate mortgages (ARMs).
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.
It is possible to switch your mortgage to an interest-only basis if you have sufficient equity in your property, an acceptable repayment plan and meet the lender's income requirements.
At the end of an interest-only mortgage, borrowers must repay the entire loan amount. Options include paying a lump sum, selling the property, remortgaging, or arranging extended repayment with the lender. Planning is crucial to avoid financial challenges and potential property repossession.
The 30-year fixed rate mortgage owes its existence to government actions to remedy dislocations in the mortgage market. The process started during the Great Depression, when the federal government created the Home Owner's Loan Corporation (HOLC) to buy defaulted mortgages and reinstate them.
You may have to pay a certain percentage as a fee for the unused funds if you haven't used the funds for at least 6 months. You'll be pay a higher interest rate for the idle funds. Your ability to borrow additional funds in the future could be difficult depending on how much extra you borrowed for the home loan.
Going interest-only likely wins if you need a significant amount of short-term help. That's because it generally reduces your monthly bills by a greater amount. HOWEVER, you pay for it in the long-run as it will likely add more to the total cost of your mortgage.
To qualify for an interest-only mortgage loan, you'll likely need: A credit score above 700. A debt-to-income (DTI) ratio below 36% A down payment of at least 15% (depending on the lender)
Advantages to Interest Only Loans
Tax Deductible – The interest you pay on a mortgage is a tax deduction which saves you money on your income taxes. Be sure to consult a licensed tax professional for any tax deductions you may be eligible for.
Overpayments directly reduce the outstanding loan balance, making the final repayment amount smaller or potentially allowing you to pay it off entirely before the term ends. When making overpayments, please be aware that you may have to pay an early repayment charge to your lender (if applicable).
We offer a range of products for customers looking to borrow up to 75% of the value of the property (loan to value or LTV). If you're looking to borrow up to 60% LTV, your whole mortgage can be interest only. Or you can take a Part & Part approach with any combination of your choice.
Yes; offset accounts can be linked to interest only loans. By keeping funds in an offset account, you can benefit from reduced interest expenses while enjoying lower monthly repayments during the interest only period.
The problem
With interest-only mortgages, the borrower makes no capital repayments on the loan, just interest. They are expected to have an investment plan in place to pay off the debt but some of these plans have been underperforming, while some borrowers never even set them up.
Here's what you have to keep in mind about interest-only mortgage loans. Once the interest-only period ends, your monthly payment goes up to account for the amount that you're now expected to pay toward the principal. Lenders want to make sure that buyers can handle the higher payment when the time comes.
The money you save from not paying off your mortgage early can give you more financial flexibility. Investing extra funds can potentially earn higher returns than you would save on mortgage interest. With extra cash flow, you can work toward other financial goals, such as saving for retirement.