An interest-only mortgage has a number of benefits for home buyers and investors alike and can give you the option to break into the housing market. But there are a few things you’ll need to consider before you get one.
At No1 Property Guide, we specialise in building no or low deposit house and land packages throughout SE QLD, NSW, and VIC. And a core part of this involves utilising interest only home loans during the construction phase. Which means we have a deep understanding of the pros and cons.
Darren Walters has more than 20 years’ experience in property, finance, and lending policies. He developed his no or low deposit new home system, to help renters break out of the rental cycle and get into their own homes. The first step is understanding your factual options. And the best way to do that is by filling in our pre-qualification form.
From there, our New Home Consultants will work with you to discuss your options. We’ll guide you through the journey from start to finish.
How Do Interest Only Home Loans Work?
As the name suggests, interest only home loans are mortgages where you will only pay the interest accrued. Not any of the principal amount. This means you’ll pay more in interest over the life of your loan, assuming a 30-year term.
It’s important to note though that interest only home loans are generally only available for a short timeframe. Usually, 1-2 years, sometimes 5 or 10 if you’re a proven property investor. This means, once the interest-free period is over, you’ll start paying towards the principal of the loan as well.
In this situation, you’re basically changing your mortgage from a 30-year mortgage to a 28-year one. This means your payments will be higher after the initial interest only period.
What are the Benefits of Interest Only Home Loans?
While higher repayments might sound like a negative, there are plenty of reasons interest only mortgages are a great idea.
The first reason is for construction loans. If you’re building your new home through No1 Property Guide, or even privately, you’re most likely going to be using a construction loan. You can find out more about construction loans here, but the important information is that your mortgage will be released in stages matching the construction of your new home.
So, it doesn’t make sense to pay the full repayments of your mortgage when you haven’t even paid for the house, and it’s still being built. That’s why you’ll only be paying the interest.
Once the construction phase is over and the remaining funds have been paid to the builder, your mortgage will kick in. And you will start making your repayments like normal.
Better for Budgeting
In some cases, you may have a small amount of debt remaining or have your income committed for a short period when you’re trying to buy a house. An interest only home loan can help get you through those first few years by reducing your repayments to something more manageable. And then once your income is freed up, you’ll be able to make the larger repayments that include your principal.
Of course, the smaller repayments upfront can help a lot if you have a short-term saving goal as well. Though you’ll need to weigh up whether that short-term saving is worth the larger repayments and increased interest over the life of the mortgage.
Ideal for Investing
One of the biggest winners of interest only loans are the investors. A popular investment strategy is to utilise interest only mortgages to reduce their costs early in the investment. Then, once the capital growth has come through, or renovations have been made, they sell the property, pay off the loan and keep the rest.
Of course, this carries some inherent risks. If the property doesn’t increase in equity as much as they thought, they may not make much, if anything, once the mortgage has been paid off.
Here at No1 Property, we can combine Darren’s unique new home system, with an interest only home loan to give you a range of investment opportunities. The first step is understanding your factual options by filling in our pre-qualification form. From there, our New Home Consultants will work with you to show you exactly what you can or can’t do.
Can I Change My Home Loan to Interest Only?
This will come down to your lender, financial situation and how much of your mortgage you’ve paid. In general, yes, you often have the option to refinance or change your mortgage to an interest only home loan. For a few years at least.
The likelihood of getting approval from your lender to switch to an interest only home loan increases the more of the principal you have paid off. If you’re ahead of your mortgage repayments and can show you can afford the larger repayments in the future, you’re likely to get approval.
How Do I Know if an Interest Only Home Loan is Right for Me?
If you’re not sure whether an interest only home loan is right for you, don’t worry! The New Home Consultants at No1 Property Guide can help guide and inform you with what your best options are. Darren Walters has more than 20 years’ experience in property, finance and lending policies. Using this experience, he created his specialised new home system to help first homeowners, those who’ve owned before and investors get back into the property market.
Your first step is the same as theirs, simply fill in our pre-qualification form and speak to our experienced team. We’ll assess your situation and discover exactly what you can or can’t do through Darren’s system. Then, you can make an informed decision over whether using an interest only home loan to get into the property market is the right choice for you. Or whether you’d prefer to stay renting.
Contact our team today to discover your new home options.