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Fancy paying interest only? Why this loan may work for you

Interest-only Loans offer borrowers lower repayments initially and are attractive to investors, first home buyers, and those buying a second home.

But, before you sign on the dotted line, let’s take some time to look at the pros and cons of interest only home loans.

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The Up Side
With this type of loan, the repayments only cover the interest and borrowers are not required to make any repayments of principal for an agreed term, usually up to 10 years, after which the loan typically converts to a principal-and-interest loan, or you can repay the loan total in full.  The lower repayments during the interest only stage, allow borrowers to use extra cash flow for other purchases or investments. 

With a principal-and-interest loan, a borrower making scheduled repayments would typically pay off about 10 per cent of the loan’s principal over the first five years, establishing a buffer against a fall in house prices. For interest-only loans, however, the absence of required principal repayments during the interest-only term means that, for a given loan-to-valuation ratio (LVR), any fall in the value of the property would be more likely to result in the borrower having negative equity than otherwise. Partly mitigating this risk is the fact that initial LVRs tend to be lower on interest-only loans than on principal-and-interest loans.

The Down Side
Interest only loans usually come with a higher interest rate that a standard home loan.  Plus, because you are not paying off any of the principal on the loan, once the interest only term ends, you may find your repayments are higher than a standard home loan. 


Make sure you get the right loan to suit you.  If you would like to talk to a local mortgage broker who understands your requirements, call Your Local Finance on .

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