Blog Regular mortgages and interest only home loans

Regular mortgages and interest only home loans

20 November 2014
Regular mortgages and interest only home loans

There are so many types of home loans available to home buyers in Australia that deciding on the right one for you and your needs can be a challenge. After all, choosing the right home loan is the first step towards a comfortable living standard, allowing you to make your regular repayments without too much financial stress or displacement. With that being said, being able to narrow down your home loan possibilities to the most suitable one for your needs can be difficult, especially for newcomers to the sector.

When it comes to choosing the right mortgage, the best approach is to take a look at what you're using the loan for and going from there. Some mortgages are more suitable for property investment, while others are a better fit for owner-occupiers and buying your own home. If you're interested in securing your own real estate, looking into a standard home loan could be your best bet, especially when it comes to making long term repayments on the property.

However, property investors should expand their horizons and consider some of the more interesting financial products on the market. One of these is the interest-only home loan, which can be a good choice for those looking into creating an investment portfolio in Australia's busy real estate market.

What makes interest-only loans different?

Unlike standard mortgages, interest-only home loan repayments do not contribute towards the principle remaining on the loan. This makes these repayment amounts significantly lower than if the owner was being charged for both interest and regular home loan payments. The basic concept behind this is the idea of capital gains and the rising value of real estate across the nation.

When taking out an interest-only home loan, the overall home loan amount is settled on, as well as the length of time that will pass before the mortgage has to be paid back. Over the period, the goal is for the home to appreciate  in value a significant amount so that upon selling the house, the investor has enough money to pay back the owing principle in full, as well as pocketing a healthy profit from the capital gains.

Therefore, only making interest payments on the loan for a number of years will help the investor to save a significant amount of money. That money can then potentially be put towards improving the property and increasing the value of the home.

Not only this, but if the property is rented out during this period as well, the income from tenants can be put towards these mortgage repayments. Putting your money to work smartly can be a big drawcard for interest-only home loans, allowing you to move money around and increase your wealth over time.

Naturally, these home loans may not be the best for owner-occupiers. While the repayment amounts are significantly lower, the mortgage terms reflect this as well. Therefore, if you're hoping to pay off the principle and own the property outright with an interest-only mortgage, this means saving up the full amount of your home loan during the interim, a task that can be daunting and almost impossible for many people.

Another risk is that, as opposed to growing in value over the mortgage period, the property has actually decreased in value. This means finding the funds to make up for the lost money, which can be a difficult and crippling financial position for anyone to find themselves in. Therefore, taking the time to properly research the market and getting good advice about the purchase is a must.