INTERESTED IN INTEREST ONLY LOANS?
Published on April 16, 2015
Ultimately the key objective of your property investment journey should be to increase your long-term wealth, which makes both the right loan structure and loan type integral to achieving your goals.
When looking at your finance, it is important to consider which options provide you with flexibility and work to your advantage during your investment journey.
Knowledge is power, and being informed of the options available to you when it comes to property investment finance will allow you to achieve the best outcome for your individual circumstances.
In this newsletter I’m going to put a spotlight on interest only loans.
What makes interest only loans so interesting?
Interest only loans mean just that – you only pay the interest component, not the principal.
They’re particularly popular with property investors because it limits your monthly repayments, allowing you to budget and potentially put extra resources towards other property investments.
The repayments of interest only loans will be lower than an ordinary principal and interest loan because you aren't required to pay down any of the principal amount owed during the term of the loan.
The flexibility you get with an interest only investment loan can also provide you greater control over your cash flow.
As part of a wealth creation strategy, interest only loans can be beneficial in terms of potentially providing tax and gearing advantages as well.
The interest payment tax deduction makes these loans especially attractive to investors who are paying a higher tax rate.
But it’s not always that simple, with many pitfalls such as loan terms and potential break fees for fixed term loans, tax bracket creep (when you end up paying more tax due to wages growth and inflation) and other issues all making professional advice important before you sign anything.
As I always say – speak with MRD first and we can inform and support you through your decision making process.
What about the principal?
The potential downside to an interest only loan is that principal on the loan is never reduced, and when the term is up you've only been covering the interest.
For owner-occupiers, interest only loans can keep mortgage payments down, but it can also be risky if you want to own your own home one day as the level of debt will not fall for the life of the loan.
For investors however, this isn't necessarily a major concern, as it's the debt that will help them achieve financial freedom, and as property values rise your loan to value ratio falls (and thus equity increases) even with interest only loans.
MRD can also arrange to have a split loan where you get the ‘best of both worlds’. The majority of your loan can be interest only to take advantage of the benefits already discussed, but with a small part of the loan set up as principal and interest so that part can be paid down quickly.
In my book 'Property Investing in a Post GFC World', I talk about why most of us have been conditioned to fear debt and avoid it at all cost.
I consider there to be three types of debt: horrible debt like credit cards, tolerable debt like your home loan, and productive debt which allows us to buy assets that appreciate in value and offer tax relief.
If you’d like to know more you can order your free copy here.
Debt can propel one person to great riches and another to poverty, and it's no secret that the majority of wealthy people manage large amounts of debt.
The MRD way is essentially to avoid horrible debt and understand the incredible wealth creating power of properly harnessing productive debt – in most cases interest only loans on investment property.
How to choose
The most common question we continue to hear is “how do I know which loan to choose?”.
While we can’t tell you whether or not to take out an interest only loan, we'll continue to dedicate our attention to highlighting some of the different loans available to help guide you when it comes time to sign on the dotted line.
In the meantime we’re able to compare what’s currently on offer from many lenders and find the best loan for your specific needs (fixed or variable) - just give us a call for an obligation free appraisal.
MRD offer a full spectrum of services relating to property acquisition, investment options, superannuation and insurance, and can help you develop clarity around your short, medium and long term financial goals.
Speaking to MRD Finance is a good starting point to find out which loan is most appropriate for your individual circumstances, and if we can help we'll also guide you through the paperwork and application requirements.
Pick up the phone and call us on 1300 883 854 or send an email to firstname.lastname@example.org with your name and best contact phone number and we'll provide you with more information, including a complimentary consultation to establish what loan structure best suits your needs.
Partnering with you for your investment success.