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  • Insights, Loan basics
Interest only loans

Oktay Sengoz

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25/10/2022

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1 min read

An interest only loan is when the bank will ask you to only pay the interest component of your loan repayment and not your principal amount. Compared to a principal and interest loan where you are required to reduce the loan balance with each repayment. The loan balance remains the same on an interest only for the interest only term.

Why would anyone ever want only pay interest on their loan?

Why wouldn’t they want to pay down the principal?

Many people can benefit from an interest only loan, depending on their current financial position and their needs and objectives.

Here are the benefits of an Interest Only loan.

Investors love it

A property investor can claim all their expenses relating to holding their investment property. All the expenses reduce their yearly taxable income. Interest on a mortgage is usually the most significant expense a property investor can claim, the higher the interest, the more tax benefit.

Cashflow

Some clients choose to only pay interest during financially challenging times e.g., while on maternity leave or reduced income (this is better if it is planned into the mortgage at the time of establishing the mortgage, if possible). During the pandemic, most clients switched to interest only while they were earning reduced incomes.

Control your equity

Why let the bank dictate your equity when you can control it yourself. Some clients may have an interest only loan where they only pay the interest and no principal, while making extra payments into an offset account. This way they can draw out the funds from the offset account as they please. The best of both worlds.

As always, get professional advice before making any financial decision. Talk to us today to see if you can benefit from an interest only.

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