What is an interest-only mortgage?
This is a home loan where only the interest portion of the loan is paid, rather than both the principal and the interest.
What are the pros of an interest-only mortgage?
This type of mortgage can be useful for buyers who plan on holding onto the property for a few years before selling it.
There are lower monthly payments. By paying only the interest portion of the loan, you are assured of a lower payment towards your mortgage.
It can help maximise tax deductions.
It can free up cash to allocate to other goals. By paying a lower monthly instalment, this can free up some cash in your budget, allowing you to spend it on other important things.
What are the cons of an interest-only mortgage?
It may not be ideal for standard home buyers looking to pay less on their monthly repayments. Keep in mind that by opting for an interest-only mortgage, the loan term will generally be shorter, so you can’t spread your payments out.
This option may not be available from every lender. Not all lenders offer interest-only mortgage options, so you need to spend a lot of time doing some research, trying to find lenders offering the right solution for your needs.
You will need to pay off the principal of the loan at some point. While paying the interest-only portion of the loan can be beneficial to you, it’s important to keep in mind that you will eventually have to pay off the principal portion.
It could tempt you to spend more money than you can really afford. An interest-only mortgage requires discipline, so if you aren’t saving, you could end up over-spending.
If an interest-only borrower is late on payment, this often triggers a rate increase.
Borrowers will face tough questions on their income and spending to assess their affordability and if they can cope in the event of interest rates rising.