Repaying the Principal Amount or only the Interest on Home Loan – Which is Beneficial?

As the name suggests, an interest-only loan is one where the borrower is only required to pay the interest on the loan and not the principal amount. This, however, lasts for only a few years. These loans are popular mainly among the investors who wish to make minimum repayments whilst the property grows in value or for negative gearing purposes.

Repaying a loan with principal and interest means each repayment you make pays a part of the principal and the interest charged. The borrower of an Interest only loan gets financial flexibility in the form of lesser loan repayments and lower monthly repayments. The extra repayments required can be made to pay off the principal amount. There should be Interest-only loans also allow the borrower to save amount on repayments that can be utilized for other expenses or investments. These loans may also assist in tax deduction. This, however, must be consulted with the Mortgage Broker for best home loan deals.

Another advantage of Interest only Loan is that the monthly payments on such loans are initially lower as compared to a conventional loan. This benefits the borrower as it allows him to afford an expensive home. However, even in such a case, the borrower will have to make higher payments after the introductory period.

The major disadvantage is that even though the borrower is making repayments every month, he is not reducing his mortgage. So, in case the property does not decrease in the value, it implies that he is not accumulating equity. Repayment savings do lessen the financial pressure in the short term however there are risks in taking a loan that does not pay off any principal. Moreover, there are a very few lenders who offer interest only to owner-occupiers. During the interest-only period, equity is not increasing in the property unless the value increases. Once the interest-only period is complete, the loan will complete the loan will revert to principal and interest over the remaining term, implying that the repayments will become higher. In this case, the client could be tempted to spend more money than he actually has.

Your professional Mortgage Broker will discuss your objectives with you to help you to ensure that this type of loan is the right product for you and offer you the home loan deals.

This information is general and is subject to change at any time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.