Purchasing your home is likely to be one of the biggest financial steps you ever take so it’s important to consider all the options that are available before choosing a type of loan. Investigating and comparing the different types of loans offered by lenders will help you become fully informed about the market.
Interest only fixed rate home loans are a very specific type of mortgage that may be good for first time investors looking to negatively gear a property and control monthly outgoing costs or owner-occupier borrowers looking to keep costs down in the early days of the loan.
What are fixed rate interest only home loans?
When you take out a standard home loan you repay it with interest. This means that you repay a portion of the principal loan amount plus interest charged by the lender. With an interest only home loan, your repayments will normally be lower because you will only be paying the interest and not be repaying any of the prinicpal sum you originally borrowed. A fixed rate interest only home loan takes this arrangement a step further because the rate of interest will not change during the loan period, allowing you to budget precisely for your outgoings.
When are fixed rate interest only home loans useful?
In most cases interest only home loans, whether at variable or fixed rates, are only available for short periods of time. This is because while you’re only paying the interest you’re not actually purchasing your home. That only happens when you start to repay part of the sum you borrowed as well as the interest. If you’re investing in a property that you plan to sell after a short period of time, fixed rate interest only home loans could work well for you.
What are some features of interest only fixed loans?
There are some main features that you should be aware of if you are thinking of applying for a fixed rate interest only home loan.
- The maximum amount the lender is prepared to offer and over what period of time is essential to budget and plan accordingly. Make sure you are clear about the lender’s permitted level of loan to value ratio (LVR). This is a calculation of how the amount you are borrowing compares with the value of your home.
- Redraw facilities allow you to reclaim funds if you have made extra payments previously. Always check whether your lender makes a charge for this facility or sets an amount to access as a minimum.
- Offset accounts are transaction accounts that may be linked to your home loan. The funds in your linked account could be used to offset the loan amount, meaning you will only be charged the interest on the difference.
What are the risks and rewards?
If you need a loan for a short period, a fixed rate interest only loan is an attractive and affordable option. It is particularly useful for investors who would use interest only payments for tax purposes and then sell the property before needing to pay off the principal. For owner-occupier borrowers, do remember that you won’t be repaying any of the original amount you borrowed during this time and at the end of the period your repayments will increase to include part of the borrowed funds plus interest.