For a long time, interest only mortgage repayments have been the main choice of many property investors.
By paying just the interest on a home loan, the investor can access the property’s equity without getting bogged down in the crippling principal payments. The bank retains ownership of the property, while the investor pays the interest and keeps any equity gained.
Most banks restrict interest only periods to up to five years, after which the investor must either revert to a standard principal and interest home loan, or refinance with another bank and start all over again. Some investors use this method as a long term tactic and have been known to have more than 20 interest only properties on the go at a time.
Others use the interest only period as a starting point and then gradually increase the rent of their tenants until it is enough to cover principal payments and make the property cash flow positive.
But interest only is no longer just for investors. An interesting turn of events has seen a slow increase in owner occupiers considering the option, often for breathing space after stretching their budgets to try and secure a house in one of Australia’s hotter markets.
Paying interest only can save 15 per cent a year, while any capital growth helps make up for lost ground on paying down the principal.
The option is also particularly appealing to first home buyers, who might be young and starting out in their professional careers.
The likelihood of progression and promotion in their jobs during the interest only period means they assume they will be able to make larger repayments later on.
However, it is important not to rely on this method as a way to afford a property that you might struggle to pay off. Interest rates are likely to rise within the next year or so and if your margins are too fine, you could wind up in hot water. You certainly don’t want to start off behind the eight ball, or in danger of falling into mortgage stress.
At any rate, interest only repayments should be a very short term option if you are an owner occupier. Your main aim should be to own your house and be free of the bank as early as possible.
Tim McIntyre is the senior real estate reporter for the Daily Telegraph and News.com.au.
Over the past decade, he has attained widespread knowledge of Australia’s many unique property markets and is an authority on all things buying, selling and investing.
His commentary appears every Saturday in the Daily Telegraph Real Estate lift out, as well as online at news.com.au.