INTEREST ONLY LOAN

Interest only loans require only require interest payments on the loan for an agreed period of time. Interest only periods are usually 5 years although some lenders offer longer interest only terms. Repayments on an interest only loan are lower than a principal and interest loan, because the principal or loan amount is not being repaid. At the end of the interest only period, loan repayments revert to principal and interest. Interest only loans are sometimes preferred by investors who plan to pay off the principal (loan) amount at a later date or when the property is sold.

Upside

  • Repayments will be lower during the interest only period compared to the repayments on a principal and interest loan.
  • Variable Interest Only loans often allow you the flexibility to pay off and redraw the principal.

Downside

  • Interest only loans don’t pay off the principal so you would expect to have the same outstanding loan amount at the end of the interest only period.
  • The repayments on an interest only loan increase at the end of the interest only period as the loan switches to principal and interest repayments.
  • In the event you are unable to extend your interest only period, repayments will increase as the loan switches to principal and interest repayments.
  • Ensure you can pay the expected principal and interest repayments before you decide to apply for an interest only loan.