An interest-only home loan gives you permission to only pay for the interest costs, albeit for a short time, usually 5-10 years. You are required to start making the principle payments once the interest-only period lapses.
Advantages of Interest-Only Loans
Interest-only home loans are attractive to potential homeowners due to low monthly repayments. Below are the benefits of these loans:
Purchase a more expensive property
These home loans can make it possible for you to purchase a pricey home than you would when using a standard mortgage that has a fixed-rate. Lenders use the debt-to-income ratio to calculate your loan limit based on your income. Since you will only be required to repay the interest on your loan, this has the effect of significantly increasing how much you can borrow.
Free up cash flow
Due to the low-interest rate charged on interest-only home loans, you can be able to choose the manner and where you want to invest. For instance, you can increase the mortgage repayment for each month or use the extra money to start a business or settle your other financial obligations.
Keep costs low
In tough economic times, you may only be able to afford an interest-only payment. When you are experiencing liquidity issues, an interest-only loan can provide an excellent option for paying rent. It is vital to note that interest-only loans require a strategy to work to your advantage and can be challenging to repay if used as an avenue to acquiring more property.
Drawbacks of interest-only
There is a cost to the low monthly payment. We now look at what are the disadvantages of paying only the interest on your home loan:
It is essential to pay your loan balance to help reduce your risk during a sale. By not paying for your loan balance, you end up owing the bank more than the value of your property. Should you wish to sell your home, you will be required to top up the variance with the bank.
An interest-only mortgage does not help you build equity in your property. This makes it hard for you to obtain cash for upgrades in the future.
An interest-only home loan is an effective way to homeownership for people operating under tight budgets. It is critical to avoid using the loans to help one own more property since this will cripple your ability to service the loan.