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Is an interest-only loan worth considering?

6 February 2016

Nick Reade, Chief Executive BankSA

Choosing a loan that best suits your personal circumstances should be an important part of any property investment strategy. The right loan can save you thousands of dollars.

Typically, if you want to buy an investment property, you may consider an interest only loan. This type of loan requires you to regularly make payments to cover only the interest component of your loan, but not the principal amount owing.

These loans are most popular with property investors because repayments are lower. This enables investors to free up cash flows for other expenses or investments, while relying on capital growth to increase the value of the purchase.

The interest payments may also be claimed as a tax deduction. To maximise tax deductibility, many investors will prefer not to make repayments on the principal as this reduces the tax deductibility of the interest.

Interest only loans are best suited for disciplined investors planning to sell in a relatively short timeframe, and for this reason most interest only loans will be offered for a relatively short term also, such as five years.

However, these loans can also be helpful if you need to obtain short term finance, for example, if you are looking at buying a new property before selling an existing one.

Be mindful that unless it’s for an investment property, or a property that you’ll only hold for a short timeframe, you will need to pay off the loan principal at some point – there’s no delaying the inevitable.

With home loan interest rates currently low, now is a great time to be paying off your loan principal. Then, if rates do rise in the future, you will be paying interest on a reduced loan size, thus reducing your overall costs. You’ll also be creating valuable equity that you can leverage for other purposes in the future.

If you’re unsure of the best options for your particular circumstances, seek advice from your local BankSA lender.