As the name would suggest, an interest only loan is a type of loan where you pay just the loan’s interest for a specific period. This type of loan is popular among property investors as it enables them to lower monthly repayments until such a time that they can afford to repay both the principal and interest; such as when their property’s value has increased or they have started earning a steady rental income.
If you wish to take out an interest only loan, consider the following:
- Low monthly payments. One of the things that make interest only loans attractive to investors are the low monthly payments due to paying just the interest of the loan instead of both that and the principal. Thus, this makes it cheaper for you to own the loan at least during the interest only period, and you will be able to start investing in property sooner instead of having to worry about how you can afford to service both the principal and interest repayments.
- Flexible payments. Just because it’s called an interest only loan doesn’t mean that you can’t pay for the principal as well. This type of loan is flexible enough to allow you to make extra principal repayments when you’re able to do so you can start chipping away at the loan amount even before the interest only period has expired. This can be a great strategy when your investment is starting to pick up and make you money.
- Better cash flow. When you’re just starting out, it’s likely that you’ll need all the funds you can get for the many expenses involved in your investment. Aside from just the loan repayments, you’ll also have to spend money to renovate the property and advertise it, as well as pay professionals who may be helping you out. By choosing an interest only loan, you’ll free up more of your funds so you can maximise your budget further.
Other Things to Consider
While interest only loans are an attractive solution for property investors, always remember that as long as you’re paying only for the interest, you’re not lowering your actual loan amount. In addition, ensure that you do your sums to determine whether or not you will still be able to afford the loan once the interest only period ends. Unless you start paying off the loan principal, you won’t be building any equity on the property, which may slow down your ability to acquire more properties if that’s a strategy you wish to employ. If you want to take out this type of loan, plan ahead so you can maximise its benefits.
All in all, an interest only loan can be beneficial to the borrower as a short-term solution. However if you’re planning on taking this out for a fairly long period, it may be a good idea to consider other options as these may be more cost effective in the long-run.