Interest Only
An ‘interest-only’ loan requires a borrower to pay only the interest component of the loan. This structure requires the repayment of the original borrowed amount in a lump sum when the loan period is complete or the property is sold. Most interest-only loans revert to a principal and interest loan after a set initial period.
Interest-only loans are generally more widely used by investors, who are attracted by the tax saving aspects and are usually not likely to hold the property for the term of the loan. They are not ideal for owner occupiers who are more focussed on building equity in their property, as the underlying home loan debt is not reduced with interest-only.
Be aware though that with an interest-only loan, there is still the potential for the property to increase in capital value as real estate prices rise, which will have a positive impact on the borrower’s equity. An interest-only loan works well for investors who want to use the property to generate rental income and capital gains.