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Is an interest-only loan right for my investment strategy?

By Rikki Cook

Experienced Redland City investors know building a strong portfolio isn’t all about finding the dream home – but also the dream finance.

For many, this ‘dream’ comes in the form of an interest-only loan, a unique option where you make repayments solely on interest over the term of the loan. Then, when the term is finished, you pay off the capital.

Already seeing the perks? We don’t blame you, but it’s important to realise these kinds of loans aren’t for everyone. If you’re just starting out interest-only loans could be too risky.

What are the advantages of an interest-only mortgage?

When you bought your very first home, an interest-only loan likely wasn’t an option. That’s because homeowners would typically struggle to repay such a large amount of borrowed capital at once. Investors, on the other hand, are more likely to rely on capital growth. They’re certain that by the end of the term, selling will provide enough money to not only repay the capital, but also make a profit.

With interest-only loans your repayments are naturally much smaller. This is advantageous for investors who want to continue to build their portfolio while they still have one or more mortgages out.

Some key benefits include:

  • Cash flow,
  • Flexibility,
  • Dept depreciation,
  • Tax advantages,
  • Less potential to fall behind on repayments.

And the risks?

While interest-only loans are great for some investors, they aren’t suitable for everyone and it’s important to consider the drawbacks before obtaining this kind of finance.

Equity grows when you make loan repayments. Small repayments, therefore, will lead to slower equity growth in your properties. For most investors, this means when the term of the loan is finished, you’re forced to sell the property.

The other option is to refinance. This might not be possible, however, if the loan balance is higher than the value of the home. While capital growth is reliable, there’s no guarantee of what interest rates will be ten, fifteen years down the line.

Whenever finalising a property sale, work closely with an experienced lender or broker as well as your Ray White Alexandra Hills property manager. Our team of experts can help you find winning properties for your growing portfolio. We can’t guarantee how the market will turn, but we can help you pick out the most suitable real estate for your strategy. To find out more, give us a call today or drop into our office.

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