Interest Only Investment loans
We say Interest Only Investment Loans because, we highly do not recommend them for a normal owner occupied home. That being said, there are times when it’s needed, when it might get tough and you need to switch to interest only to help make repayments. We have all been there, especially me.
So if we are not recommending them, then why would anyone get one? Well, they can work really well for investors, let us explain.
If you are looking to invest in property – or are already an investor – an interest only mortgage limits your monthly repayments to just the interest.
What this does is let you have greater control over your cash flow, with the extra cashflow this can free you up, to make further investments into property. This is commonly used when an investor is trying to leverage themselves into the market, as much as possible and is aiming to make capital gains with the plan to pay back the loan in full when they sell the property.
The investor pockets the gains and because he has minimised he’s repayments, he was able to buy another property that has also increased in vale.
It Sounds Great On Paper
This is how interest only loans are commonly used, it sounds fantastic on paper, but just remember there is a risk. The risk is, what happens if the property doesn’t go up in value, or, goes up only a few percent? In this scenario the investor could be left paying for an investment property for a number of years without having any gains from the investment.
Play this scenario again with the property market going down and you have a very troubling scenario
Imagine the scenario of the property investor paying the interest only loan for yrs and the property market goes down 20%. The same investor has not made any principle repayments on the investment, so still owes the full amount he borrowed, he also bought another property in the same area, so he has double their losses and even if he sells he’s properties, he is out of pocket a substantial amount of money.
The take away from this, is its important to make sure your future finances can support this strategy and to understand the risk so you can better adapt your investment strategy to minimise this risk.