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 [Interest only loans – what good are they?]

Most of the time when shopping for mortgage loans, many house buyers neglect to explore interest only loans but instead focus their attention on standard principal-plus-interest products. In reality, interest only loans bring many benefits especially for property investment purposes, but at the same time include certain elements of risk as well.

Important Tips for interest only loans:

Interest only loans work well for those who do not have a fixed monthly income but instead get paid in huge lump sums at certain intervals within a year. Therefore, these borrowers will only service the interests monthly, but pay up on their loan principal every few months, thus gaining a reduction in monthly repayment amounts thereafter.

Apart from that, this type of loan also works to benefit property investors who are able to obtain steady rental income from the property that is being financed to support monthly interests. Also, as property investors plan to capitalize on property price gains, repayments on principal will be made at the end of the loan term when the property is sold.

One of the drawbacks of using interest only loans for the home owner is as the principal of the loan is not amortized, the home owner basically does not gain back the equity of the home. Therefore, if they do decide to revert to include their principal in monthly installments later, their repayment amounts will escalate. Also, some home owners use this type of loan to free up more cash to be invested elsewhere. However, discipline must be applied to ensure that these additional funds are not spent on non-income generating expenses instead, which defeats the purpose of getting an interest only loan in the first place.

Finally, for the property investor, the greatest risk would be that the property depreciates in value, where the resale value at the end of the loan term may not be adequate to pay for the principal. In this case, this venture will be a losing investment for the property investor, where he or she would end up having to inject personal funds to cover the principal repayment.