There’s been a lot of talk about this type of loan structure lately, with industry heavyweights such as John Symonds (Aussie Home Loans) and Mark Bouris (Yellow Brick Road) weighing in on the topic. Symonds went as far as calling for a ban this type of loan, whereas many, such as Bouris consider it effective when used correctly, in tandem with professional financial advice.
With a normal loan, each monthly payment would consist of an amount that’s paid off the debt (principle) and the interest (basically the fee to borrow the money), with an interest only loan, as the name implies, the borrower need only pay the interest, and the monthly payment is substantially less. The principle is not reduced. This structure is generally only available for a short term, of say 1-5 years.
This type of loan has been popular with investors who seek to keep their monthly commitments low whilst aiming to sell the property quickly. In recent times this type of loan has become popular with people seeking to reduce their monthly payments due to financial stress, or other commitments.
Symond’s argues that “Homeowners need to reduce debt. And if you can’t reduce debt when we’re enjoying the lowest interest rates ever – well I don’t think you should be borrowing money,” he said. (Read more at 9News). Both Symonds and Bouris concur that this is a product designed for investors, with Bouris going onto say it can be a tax-effective way to invest in property (Read More at SMH).
You can compare the repayment differences with this Interest Only Mortgage Calculator.
According to ASIC (Australian Securities and Investment Commission) interest-only loans as a percentage of new housing loan approvals by banks, reached a new high of 42.5% in the September 2014 quarter, more here and ASIC holds some concerns over lenders properly qualifying borrowers in terms of income and living expenses.