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What is an Interest-Only Loan?

What is an Interest-Only Loan or Mortgage?

An interest-only loan is structured so that you only pay the interest component on your loan. For these loans, the principal of the loan is not repaid during this repayment period.

There is usually a specified, short-term period set. These are different to a standard home loan where repayments cover both the interest and a small amount of the principal loan in each payment.

Interest-only loans were originally created for investors. Loan repayments are lower (as there is no principal included in the repayment by the investor), and the rental income by the tenant covers the difference. This structure gives the investor greater cashflow and potentially frees up funds for other investments. However, they are now becoming more popular with owner-occupiers who want or need to reduce their mortgage repayments for a period of time, or may wish to take on a short-term property project, eg, flipping.

As the lending environment is always changing and legislation becoming more rigorous, there have been changes across the Australian lending environment with the use of interest-only loans. It is wise to chat with us before considering any type of interest only finance.

We always recommend to secure independent advice from an experienced mortgage broker before you sign on to any mortgage. Consider it as a cross-check before embarking on what is often a person’s largest financial commitment in life. It may save you thousands, it is also a complimentary service.

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