Interest Only Home Loans For Investors
Interest Only Loans for Investors
Property investors are often able to access particular types of home loans referred to as interest only loans. These borrowing options are unique in the sense that they allow the borrower to only repay the interest on what they have received from a lender, for a pre-defined amount of time. By doing so, the total cost of repayments can be pushed back, allowing investors time to accumulate more cash for renovations; or to prepare for their repayment plan.
How do these types of interest only loans for investors work?
There are two main types of loans available on the market – those being interest and principal. Principal loans refer to the total cost of an amount borrowed and the more that is paid off, the lower the principal loan becomes. With interest only loans, the agreement made between the borrower and their lender will typically dictate that for a certain amount of time, only the cost of the interest will be paid back to the bank.
For example, if $100,000 is borrowed and is due to be repaid over the course of 20 years, the borrower can opt to apply for an interest only option – allowing them a year, two years, or even five years to push back the $100,000 until the time has passed. In the meantime, and until they begin repaying the $100,000 debt, the borrower will simply be responsible for covering the cost of the ‘would-be’ interest.
So, if they were due to pay back $416 a month (as would be the case when borrowing $100,000) for 20 years with an interest rate of 4%, they would instead just have to pay the additional 4% (roughly $18). Although the debt will still be owed – the time that can be gained by opting for an interest only deal can allow more cash to be accrued; allowing a property to be renovated ready for a re-sale or to be let out to tenants.
Are there any catches to interest only loans?
The benefits of this type of loan can far outweigh the disadvantages, but there is still one particular factor to consider before signing up to this option. The fact that once the initial interest only period comes to an end, the repayments due after that point will be a little higher than they would’ve been had they have been repaid from the beginning of the agreement.
If a 20 year period was decided on, but the first 5 years were spent enjoying the interest only grace period, then the remaining debt will need to be paid back within the next 15 years; making the repayments a little higher than they would have been if the extra 5 years were available.
You can find out how much it is possible to borrow using an online mortgage calculator.