In your quest to buy smartly, you may run into interest-only (IO) home loans.
What are they and why could they be of interest?
Read on to find out more.
What are IO loans?
As the name suggests, IO home loans are loans that require you to pay only the interest in lender repayments.
By that we mean, just the interest on your principal, or the amount you borrowed.
In comparison, your average loan is a principal and interest (PI) one, which comprises repayments on your principal as well as the required interest on this sum.
But there’s more to IO loans than first meets the eye.
What are the ins and outs of IO loans?
These loans ensure new homeowners and property investors initially enjoy smaller loan repayments.
However, as with all good things, IO loans too must come to an end.
Lenders usually only offer an IO option for up to five years before your “real” PI loan begins.
And most importantly, those PI repayments will be higher than they would have been had you begun with a PI loan and stayed with it.
Why?
By only making repayments towards the interest alone which is owed on the principal loan amount, IO mortgage holders aren’t reducing the loan of that principal – and this does need to be paid back to the lender at some point.
Adding to these higher repayments is a potentially higher interest rate on IO loans, compared to their PI cousins.
Could IO loans work for me?
There’s little doubt paying less on your mortgage sounds extremely tempting, especially for uncertain first-home buyers.
As well, IO loans are attractive to those struggling to come up with the cash goods on early mortgage difficulties such as unlooked-for repairs or a lower income.
But if you’re confident you have money in the bank to repay a PI loan, do so.
However, if you believe you need to take advantage of an IO loan, prepare for the higher long-term repayments by ensuring you know what these will be after the IO period ends.
Don’t forget interest rates may also rise during the IO period, which will, in turn, affect your repayments.
Finally, be prepared well in advance of this period’s expiration for repayments to rise.
What’s next?
Easy!
Come to Lending Loop with any questions you have regarding IO loans as well as PI possibilities and similar property purchase questions including refinancing.
We always enjoy having your back and giving you the many competitive rates we can offer from more than 40 of Australia’s biggest banks and specialist lenders, along with plenty of great loan advice and tips.
So, give us a call today at Lending Loop.
