Unravelling the Interest Only Loan confusion
John J Maxwell | November 30, 2017
If you’ve been following the headlines or reading finance articles over the last 12 months, you would have heard a great deal of talk about investment debt and interest-only mortgages.
Statistically speaking, the government, and finance & banking authorities have been greatly concerned about the economic concerns about an excessively high proportion of mortgages being set as interest-only (IO) as opposed to principal reducing mortgages (P&I).
This has no doubt created a lot of confusion with consumers as more and more mortgage brokers talk about Principal and Interest loan interest rates being more attractive than interest only.
So how do you know what strategy and loan type is right for you?
Let’s take a look at 10 keys to interest-only loans:
1. Interest only loans do NOT reduce the balance of your initial loan, over time – unless you commit additional repayment amounts above your minimum mortgage repayment [and not redraw any money from the available balance].
2. Interest only repayments can only be set for a period of 1 – 5 years.
3. Interest only mortgage interest rates are higher than the principal and interest mortgage rates.
4. Interest only loans are best used for property investors who have existing investment and personal debt.
5. If using an interest only investment loan you should calculate the ordinary principal amount of this loan and add this amount [at least] to your personal mortgage repayment amounts.
6. Interest only loans are NOT a way to lower your mortgage repayments other than for a short-term cash-flow period surrounding a life event issue.
7. If you have zero personal debt and have existing investment debt. You should be paying principal and interest repayment to reduce the debt as soon as possible.
8. Whilst you have a personal home loan, paying interest only repayments can preserve the investment debt level which your accountant can use to maximize your tax benefits and minimize the amount of tax you pay by not paying unnecessary or excessive tax.
9. When calculating the affordability and lending capacity for each client, I mortgage broker must still calculate for the mortgage to be repaid over the remaining term. Although you might want to get an interest-only mortgage for investment strategy, you may not be able to afford it. Your mortgage expert can research your circumstances for you.
Make sure you review your finances and loan structures at least every 12 months with your mortgage expert and accountant to ensure you are maximizing your financial position and know exactly if and when your circumstances might change for the better or for the worst. Your mortgage broker can help you stay ahead of the game and assist you to be using advanced debt reductions strategies.
John J Maxwell, senior mortgage & finance consultant, Cocalex Holistic Consulting
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About the author:
John Maxwell is the founder and Senior Finance & Business Strategist at Cocalex Holistic Consulting. John has over 17 years' experience in the financial services sector, and has owned and managed 9 mortgage franchises and has developed a background in the holistic financial services realm. He has particular focus and passion for Leadership Training & Development, Writing, Franchise Development, and Business Networking.
