If you are in the market for a new property you may have run into the question of the type of loan you should use. One of the options you may have seen is an “interest only” loan. An interest only loan is exactly what it sounds like: each month, you pay the interest that has acquired on the loan, while the principal remains the same. In a recent report, the Australian Securities and Investment Commission (ASIC) has called for a crackdown in the approval of interest only loans. ASIC found that many interest-only loans that were approved did not meet responsible lending obligations, potentially leading to borrowers not being able to make the repayments in the longer term.
A downfall of interest only loans is that the principal will never decrease so long as you only make the monthly payments. This means you could own the property–and make payments on it–for thirty years, and at the end of that time you would still owe the same amount that you owed the day you took out the loan.
The upshot of using an interest only loan is that your payments will be lower–after all, you will only be paying the interest on the loan without attempting to repay the principal. This will leave you more money each month to reinvest in the property through improvements, landscaping, and so on.
As a result, you may see your property values rise more quickly than you would if you did not have the extra money to invest in property improvements. Thus, although your principal balance on the loan will never decrease, you could still find yourself making a fair amount of money when you resell the property down the road.
Mainly due to the ASIC report mentioned above, Australian lenders have implemented changes to the way in which they assess interest-only loan applications to ensure they comply with all responsible lending obligations.
The choice of which type of loan to use is one that should not be made without adequate information on all of your options. Contact us today and we will be happy to assist you in gathering the information you need.
Mortgage Masters are expert mortgage brokers in Newcastle, Maitland and Hunter Valley. Get the best mortgage advice by contacting us today!