Interest Only Home Loans

Interest only home loans were introduced by financial institutions for investors. In old days there was no way to purchase property without the full capacity to pay monthly interest and the principal.

However, the private owners had very little flexibility in their loan. The current - almost incredibly high - prices of properties in Australia brought a new change in the mind-set of banks and the borrowers.

Everybody understands that the private property is also an investment. Banks understand the appreciated value of homes and borrowers can use their houses as assets.

A lot of borrowers do have a short and long term financial plan. For example, you can get an overseas contract for 5 years but you do not want to sell your property in Australia. Thus, there is not enough money to pay for both places.

However, the low repayments of interest only home loan will save your house and still let you pay bills in the new place. Once the contract is finished, you go back to your home and continue paying off interest and the principal.

How Does Interest Only Home Loans Work?

For example, a financial institution offers an interest only home loan for 10 years. The loan has to be repaid in 30 years. This means that you can pay interest only for the next 10 years. However, within the next 20 years you must pay interest and the principal to repay the entire loan.

The benefit is that during the first 10 years you own the property, which often appreciates in value. However, (for 10 years) you are paying off an interest, which is not added to the repayments of your loan. The question is: does it work for me?

Interest Only Home Loans For Owner Occupiers

Do the 'interest only home loans' work for me? That really depends on the situation. If you can afford to either rent a house or pay the interest only home loan then the latter is a better choice. If you pay the rent or the interest only loan then the money does not reduce your future repayments.

However, the interest only home loan secures your house. This way you are protected from rent increases as well as high cost of future property prices. The downside is that the government will only assist with the rent and not the purchase of assets. Also, the interest only home loans should not be used to save money for basic payments (like groceries, electricity bills etc). The fact is that 1% of all Australian households use interest only home loans to finance their primary place of living.