The Benefit Of Interest-Only Residential Home Loans Interest only home loans explained: what they are, who they suit, and the trade-off to weigh first.

Interest-only residential home loans are residential mortgages where your monthly repayments are composed of only the interest that is charged by your lender.

They vary in difference compared to the traditional amortising loans, where monthly repayments are made up of both principal and interest. When both the principal and interest are paid, your loan balance is reduced during your loan term. Since interest is determined by the outstanding balance of your residential home loan, the specified amount of interest that you will be expected to pay will, in turn, also reduce.

On the other hand, when it comes to an interest-only loan, your loan balance during your loan term will not reduce due to the fact that your repayments will only cover the interest on the amount you have borrowed. Your loan balance is not reducing, and hence you will end up paying an increased amount of interest over the period of your loan.

If you are unsure if interest-only residential property loans are the right fit for you, we have outlined a few of the benefits that come along with an interest-only residential loan.

Very Suitable For Construction Loans & Valued-Added Projects

In the instance that an investor is constructing a property, there is a requirement to try and preserve as much cash as you can during the construction phase of the project. Correspondingly, a general construction loan contains a pre-funded interest reserve account from which interest-only repayments are withdrawn whilst the property is under construction. When the property has been built and has been tenanted, the payments of your loan change from interest-only to principal and interest in order to line up with the property’s enhanced income.

This notion is very similar when it comes to value-added projects. Investors have elevated upfront costs to renovate a property, and there is a necessity to utilise their capital for this purpose. Obtaining an interest-only loan is very beneficial for an investor as they are able to conserve their capital until the renovations are completed, and the property is capable enough to produce enough income to gradually write off the initial cost of the loan.

Stabilises & Advances Your Cash Flow

Prospering property investment is all about cash flow. Utilising an interest-only loan can enable you to be more in control of your cash flow over the period of your loan term. To make the most out of the compounding and leverage of your investment property, you need to hold your investment properties for an extended amount of time. Therefore, the only way to do this is by creating financial buffers or cash flow.

Interest-only home loan repayments allow you to pay the merest amount demanded by your loan. This then provides you with extra money in your pocket to pay for any added expenses such as council rates or repairs.

Allows You To Prioritise Your Debt Allocation

Interest-only loans for the purchasing of residential properties are very beneficial as it provides you with the ability to pay off your debt. Interest-only repayments indicate that you are servicing your loan whilst your property advances in value. Furthermore, these interest-only repayments are also deductible from your income, ultimately reducing your tax.

In the meantime, with an interest-only residential loan, you have the ability to pay off any non-deductible debt, such as your credit cards or your car. Paying these debts off should be a priority.

Use Of Offset Accounts Reduce Your Interest-Only Repayments Even Further

An offset account is a simple transaction account that enables you to utilise your surplus cash in order to offset against the interest applicable to your loan. They work by providing you with the ability to transfer any additional savings that you have into an account that is then linked towards your mortgage. This extra cash is used to counteract your mortgage and hence minimises your interest repayment amount.

Proves To Be Very Tax Effective

In Australia, it is acceptable for all investors to claim back any costs that are linked with owning assets, and this does involve interest on residential investment property loans. In regards to property investors, the interest element of their residential property loans is added to the annual costs of retaining a real estate investment. Needless to say, this is offset by the income that is obtained through rent.

Making use of interest-only residential home loans makes it effortless to determine what your annual repayments are.

Reach out to Greenline Home Loans today!