While there may be benefits to having “interest only repayments” on your loan for a period of time [e.g. lower repayments during the Interest Only period or possible tax advantages for Investment Loans (refer to your Accountant for advice)], there are also other factors that need to be considered.

Risks to be considered with interest only loan:

The following list shows some of the main risks that should be considered when weighing up whether an interest only loan is the suitable option for you:

• More paid in total interest over the full term of the loan.
• Total cost of the loan will be higher over the full term of the loan.
• Your repayments will increase after the interest-only period  (the loan balance remains the same but the loan term at the end of the interest only period is shorter)
• No equity being built during the Interest Only term (excluding any movements in the value of the property). Greater risk of going into negative equity if there is a significant downturn in the property market.
• Failure to carry out any planned strategy; e.g. pay off other higher interest debt; invest saving in the repayments; redirect the repayment savings to other investments; etc, may negate any advantage in having an Interest Only loan
• You will owe exactly the same amount of money at the end of the Interest Only period as you owe now – you’re just servicing a debt instead of paying it off or improving your situation.

Refer to the Lender’s loan offer documentation prior to signing to ensure you are aware of any Lender specific requirements.

Benefits to be considered with interest only loans:

The following lists some of the benefits that may be derived by selecting an interest only loan:

• Possible tax advantages for Investment Loans (please refer to your Accountant for advice).
• Redirect the surplus funds to pay off debts that are at a higher interest rate.
• Reduce costs for a period of time when first moving into a property to cover items to be purchased.
• Reduce costs for a period of time to suit lifestyle needs, e.g. during maternity leave; while returning to studies; career break; etc.
• Self-employed or variable income (e.g. commissions/bonuses) – may need flexibility in repayments because of fluctuating income.
• Future Investment – free funds up for other investments (other property, shares, etc).
• Temporary and one-off expenses – may be a strategy used by First Home buyers or for Construction Loans to free up cash for unexpected (or expected) purchases and to set themselves up.
• Bridging Finance – keep outgoings low during the bridging period

NB: These lists may not address every single risk or benefit for every lender available.

We hope that this article has provided some insights into the risks and benefits when taking out an interest only loan in Australia. The above is general advice only. If you would like personal advice tailored to your individual circumstances, please feel free to contact the team at Probroker on 1800 195 123 or info@probroker.com.au