Pros & Cons of Interest-Only Home Loans

  • Posted 01 Oct
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Pros & Cons of Interest-Only Home Loans

If you’re not sure what an interest-only home loan is, it’s a type of home loan where, for a fixed amount of time, you make repayments of the loan interest only and not of the principal amount. After the interest-only period is over, however, you have to pay off both the principal and the interest.

There are other options you might want to consider after the interest-only period is over, such as refinancing your home or paying off the remainder of the loan at once, or whether you set up a further period of interest-only payments.

An interest-only home loan might be a good solution for a lot of first home buyers. For instance, if you’re interested in buying a home but you intend to sell it within a short span of time, an interest-only home loan will be best suited for you.

Alternatively, if you’ve gotten a promotion that comes with an impressive raise, you can take out an interest-only home loan, because even though you can’t pay a lot right now, you can do so in the future.

Like all major financial instruments, interest-only home loans have their pros and cons. To help navigate your way through your options, below is a list of the pros and cons of interest-only home loans.

Pros

  1. Monthly repayments for the loan are quite low for a specified amount of time in the beginning. Low repayments are great for saving money. This can be very useful if your budget is tight at the time, or if you want to save some money for maintenance or renovation of your property.
  2. You can make major savings from the low repayments and save up for an upgrade. If you think you’ll have access to more money in the future, you can use that along with these savings to buy a bigger, more expensive house, by avoiding spending too much on the current property.
  3. You can use the cash you’re saving from the small monthly payments for some other purpose. If you’ve got a family member who’s suddenly taken ill, or a child whose education takes priority, small monthly payments open up opportunities for you to save for emergencies or unprecedented situations like these. As long as you’re saving for larger repayments in the future or thinking of refinancing, small monthly loan repayments via interest-only home loans are a great option.

Cons

  1. If you don’t plan your finances carefully, you might fail to make the principal payments when the time comes. Sooner or later, you’ll need to pay off the principal amount along with the interest, and that amount will be much higher. If you don’t save up for it, you won’t be able to afford the repayments. This might even lead to you losing your home.
  2. The total amount of money spent on repayments adds up to a higher amount in the case of interest-only home loans. To state it simply, you won’t be saving yourself any money. You’ll simply be delaying the payment – although there is a balance to making this work. Talking to a financial advisor will help determine whether this is a good option or not.
  3. The rate of interest on these loans is flexible. So if the interest rates rise, you’ll end up paying a larger amount of money every month than what you had originally planned. Adding a buffer to your loan will help mitigate this.

Still not sure what you should do? Our home loan experts will be glad to help you figure it out. Get in touch with us today to know more about what’s the best solution for you.

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