With Interest Rates at an all time low and with predictions they may go even lower, members of Dollars with Sense are asking are Interest Only loans still worth it?
Interest-only home loans is where you only have to make payments of the interest on the loan for a set period of time. You don’t have to repay the principal on the loan (the loan amount) like in a principal and interest loan. Interest Only loans are predominately vivid in the investment portfolio sector of lending. Most investors would look favourably upon interest only to assist them in achieving negative gearing.
The question that has come about recently is with interest rates so low is seeking interest only for investment still the best way to move forward? Like most things in life, the answer to this query is about making a choice with informed information.
Let’s look at an example given recent rate decreases to assist you if you are wondering if having an interest only loan for investment is still beneficial for you:
John has an investment property that he currently has on interest only for 5 years. He owes $550,000 with a current interest rate of 4.2%. He receives rental income of $410 per week. The property is worth $615,000.
- $550,000 @ 4.2% equates to repayment of $444.23 per week and receives income of around $410 per week and is out of pocket $34.23 a week
If John were to look at principal and interest repayments assisting him in building equity from day one, with an indicative interest rate 3.2%
- $550,000 @ 3.2% equates to repayment of $548.57 per week and receives income of around $420 per week and is out of pocket $128.57 a week
In the above example the out of pocket expense for John is a difference of $94.24 a week and John would still get to utilise the tax benefit of the interest charge through principal and interest repayments. The main difference comes when John looks at his portfolio in 5 years. With interest only John will still owe $550,000 in 5 years, alternatively, with principal and interest repayments John would be seeing him pay off close to $58,000 in principal meaning he would be owing around $496,000 in 5 years. The extra equity that John is accumulating in those years can assist him with either purchasing another property to grow his portfolio by leveraging for use towards loan to value ratio or alternatively, if John decided to sell, he would receive more capital in his pocket.
For each individual, the answer to the query this article is raising will vary depending on what the prime objective for the individual is. Some may want to limit the cash flow connected to an investment property whilst others may want to improve capital gain.
Interest Only loans were designed with a very specific type of borrower in mind and they are not a loan for everyone, and they have their place in the finance industry.
If you are unsure whether your current finances are working with you towards your prime objectives, then please give us a call or use the free consultation button. Information is the key to achieving any objective, goal or dream- don’t be left wondering anymore.