Benefits of interest-only repayments

Benefits of interest-only repayments

An interest-only home loan is similar in most ways to a regular mortgage product. That is, you speak with a lender and take out an agreed upon amount to fund your property purchase. However, the fundamental difference between the two home loan types surrounds repayments and they way these products are paid off over time.

How do interest-only home loans work?

With normal mortgages, making repayments means chipping away at the principal balance borrowed from a lender with interest added on top of this. As time goes on you'll slowly begin to become the owner of a larger share of your home, until you own the property outright. 

Interest-only home loans are different in that the only repayments made are interest charged on the loan balance. While these often work out to be lower amounts than a traditional payment method, naturally you won't begin reducing the overall owing balance. 

These mortgages are usually limited to between five and ten years, after which time the mortgage will automatically revert to a standard mortgage type with a regular principal and interest payment schedule. 

What are the benefits of interest-only home loans?

The majority of the time, these home loan products are often sought by property investors. This is due to the lower monthly repayment amounts, allowing them to save their cash flow and put this towards increasing the overall value of the real estate. After the property is sold for a profit, the mortgage can be paid off in one payment.

Furthermore, it could allow for investors to expand their portfolio further. For example, an investor may only be able to afford two properties on a traditional principal/interest repayment plan. But having three interest-only mortgages expands their portfolio, opening up more avenues for rental yields and growth in the future.

Image credit: