Interest only loans allow borrowers to pay only a loan’s interest during a specific period, generally five or ten years. Traditionally, investors have used these loans to maximise cash flow and free up money to purchase more investment property. However, interest only home loans have increased in popularity.
Loan Term
Typically, the interest only period is five years. During this period, you only need to pay the interest. After these five years, you begin repaying the principal. However, most lenders will let you extend your interest only period by another five years if you make regular repayments. With traditional home loan, you have the option of making weekly or fortnightly payments, but with IO loans, a bank may require you to make monthly payments. In addition, you can make additional loan repayments, allowing for faster repayment and reducing the amount of interest you need to pay.
How to be approved
Banks will determine whether or not you qualify for an IO home loan depending on your LVR and your loan’s purpose.
- If you have a qualified reason for choosing an IO loan, you can borrow 90% of the value of your property.
- If you are applying for an IO investment loan, you can borrow between 90 and 95% of the value of your property.
- In general, the interest rate for these loan is between .1 and .55%.
It can be challenging to apply for an IO home loan, so consulting with a mortgage broker is essential. When choosing to apply for an interest only loan, you should consider your financial goals and situation. Interest only home loan are helpful if you are purchasing a new home before you can sell your old one or if you are planning for retirement or have a temporary income setback. Even with a valid reason, banks may still be reluctant to approve an interest only mortgage. Mortgage Street, a non-bank lender, and its team of brokers can help you secure an IO loan with the best possible rate.