Interest-only home loan is very common term in the mortgage industry. It involves a client taking a loan, and they are required to pay the resulting just interest on that loan first for a given period. The principal will be repaid either in subsequent payment or in a lump sum at a specific date. Many brokers suggests customer take these advantages if customer has a bit of hardship to repay.
Basically in this type of loan, for the initial repayment period or years, only the interest is paid as opposed to the norm where you pay both the interest and principal at the same time. These interest payments could be made throughout the entire loan period or for a specific time. The good thing with interest only mortgage repayment is that you will be making lower payments for some time, which could mean you can invest your money
somewhere else in the meantime.
In this blog, I am going to write some of the advantages of having an interest-only loan.
Advantages of Interest-only Mortgage
Low monthly payments: If you have this facility, you need to pay low monthly payments which allow you to have a holiday or make a different financial plan. A person servicing an interest-only mortgage usually pays low repayments for the loan. That is because they will be servicing only the interest, which is, of course, not high. The other bank
loan repayment strategies involve repayment of the principal and interest at the same time. Thus making the monthly installments high as compared to the interest-only loans.
Investment strategy: It is a very important & useful technique for an investor. He or she can plan or have implemented different investment strategies. For a person that has a growing stock portfolio in any financial industry, they would not be willing to let go of their investments to finance the home loan. You could also be having sufficient cash flow to repay the loan, but you plan on saving it for retirement purposes or want to invest in equity. It will be convenient in such scenarios. With this kind of loan, you can even start another business that will grow and service the loan from the profits. The loan structure gives you ample space and resources to engage in other income-generating ventures as you still repay the interest first.
Rising income: Everybody wants to increase their income. Well, taking a loan as a student would be overwhelming since all your cash is spent on tuition. However, if you just cleared school and already secured a job where you are sure of a paycheck every month, then you can take this mortgage and save yourself the home purchase cost.
You can find a bigger house: This loan option will be beneficial if you are expecting lots of cash flow in the future. However, you should also assess whether the home you are planning on purchasing can be easily financed now before you receive the huge lump sum in the future. The loan payments will shoot afterward, and you will have to remit more copious amounts.
Pay scheduled Equity: Many of the interest-only loans will not restrict you from adding cash on the interest repayment to reduce the principal money. Such as act will lower the payment afterward when repaying the
principal. It is helpful when the guarantor has varied income every month. That means that in some months you can pay less than the required while in some you pay more.
Rising housing prices: In New Zealand market, house pricing is increasing day by day. In increasing market prices for houses, several investors will take in the interest only option and purchase the property. They will then sell that property after a few years before the principal
repayment period. They will make some profit from such an investment. However, this is ideal for investors who are risk takers and can take any setbacks that may occur in future. Supposing the house prices do not hike and you fail to secure someone to purchase the home? You could end up selling it at a loss or being declared bankrupt since you were unable to finance the principal.
Faster repayment: When you pay further installments, they go to the principal. That means that when paying the principal, you will pay in less monthly installments, but for the other loans, even if you overpay
some payments, the monthly installment for the principal is not reduced in any way. With reduced monthly installments you are sure to even continue overpaying the installments. Hence you will have an easy time repaying the loan as you service your other investments.
