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If you’ve stumbled upon this page, you may have already been wondering “what are interest only loans?”. Well, Nifty is here to give you the run-down! The pros, cons; uses and pitfalls for all things interest only loans! Now just to be clear, this is not a product that we offer, but we aim to provide our customers with knowledge of all things finance. So, let’s get started! PS Check out our main page for fast loan options!
Most types of finance are usually borrowed and paid back over a set period of time. Depending on the type of loan, this could be from a few years to a couple of decades. With a traditional loan, the amount borrowed (the principal) incurs interest over this period and any payments made cover a portion of this interest and a portion of the principal. This way, the interest on the loan will over time reduce, the speed of which depending on the loan terms.
Interest only loans differ from traditional loans in the way the repayments are structured and applied to the balance. When a payment is made to this type of loan, the payment is applied to only the interest, not the principal. This results in lower monthly payments for a fixed period of time. This period is known as the ‘interest-only period’. Once this ends, which is typically between three to 10 years, the loan will transition to a regular amortising loan, where the interest and principal are included within the repayments. Due to the way this type of loan is structured, lenders generally only offer interest-only finance in the form of home loans or business loans.
To get a better understanding of the difference between an interest-only loan and a principal & interest loan, we have compared the two types using the following loan terms:
|Loan Type||Interest Rate||Monthly Repayment||Total Repaid|
|Interest Only||5.04% p.a.||$840 -$1,271**||$355,369|
|Principal & Interest||4.55% p.a.||$1,118||$335,205|
*Disclaimer: The above comparison is an example only, as such, the results should only be used as an indication.
**Repayment increased after an interest-only period of 5 years.
As you can see from the table above, the difference between an interest only loan and an interest and principal loan can make a considerable difference in the total repaid over an extended period of time.
Got a specific amount that you are looking at borrowing? The government’s Money Smart website also provides a great interest only loan calculator that you can use.
There are some key advantages that should be recognised for those looking into interest only finance. So, whether you’re a future homeowner or keen investor, get to know how interest only loans could help!
Due to the unique payment structure for interest only loans, the initial costs will work out to be lower than that of a normal amortised loan. This could be useful for those paying off multiple debts at once. For example, let’s say you are searching for finance to purchase a house, but are also paying off other debts; maybe a car loan and a credit card. When you find the perfect home, you realise you may not be able to comfortably afford the repayments for an amortised loan at the amount you need to borrow. With an interest-only loan, however, you know that you can comfortably fit the repayments into your budget.
Now, although the repayments will eventually increase, the interest-only period offers a number of benefits. Not only are you able to purchase the property you wanted, but you are given time to pay off both the car loan and credit card before repayments increase. So, when the time comes, you are able to meet the repayments comfortably.
One major benefit in utilising an interest only loan as an investor is the fact that loan interest payments are considered tax-deductible. As the entire repayment for interest only loans are used to cover the interest, this means that the entire repayment can be written off at the end of the year. This can be especially effective when coupled with a negative gearing strategy. In short, negative gearing is a tax concession that allows the investor to offset any losses made on the investment property against their personal income. This is crucial for those looking to minimise their losses whilst waiting for their property to appreciate.
Interest only loans can quickly turn into a liability if not used and managed effectively. This can be attributed to a number of reasons, some of which have been listed below. So, if you’re willing to learn, keep reading!
Interest only loans will often carry a higher interest rate during the interest-only period. This will normally reduce once the period is over, although, the fact that the principle has not reduced means that the total amount repaid on the loan will likely be significantly higher than that of a traditional loan.
Due to the fact that you are not reducing the principal of the loan during the interest-only period, you are also not building any more equity. This could be an issue if, for whatever reason, you are required to sell a property. If the house has not appreciated and you do not have any equity in the property, you could be forced into a position where you owe more than you can sell for.
Although lower repayments may be appealing, the fact still remains that the repayments will eventually increase, which could even be higher than those of a standard amortised loan. Those who are not intimately aware of their loan terms may be caught off guard by this change. This risk becomes even greater if your other living expenses have increased since taking the loan, or if your income has decreased.
As a takeaway, interest only loans can be a useful tool when looking to invest or enter the housing market. Though, it is important to understand the key differences from traditional loans. You should not look into this type of loan purely for the lower repayments, but consider how you would take advantage of the benefits as a whole. Often this type of loan will be very complex, and before considering one, you should always consider consulting with a professional financial or legal advisor, as we know every person’s situation is different. You can also use a local broker who can find you a great deal and guide you through the application process. If you would like to use a trusted broker, you can even contact Nifty, as we work with some of Australia’s premier brokers. Send us a message of give us a call and we can put you in touch with them to fast track your interest only loan!
Now that you’re up to date with interest only loans, want to know more about us? Nifty loans may not provide interest only loans, but we do offer a range of short term financial products, including personal loans from $300 to $5,000. The table below has a breakdown of our products.
|Loan Type||Amount||Loan Security||Interest Only Available|
|Small Personal Loan||$300 – $2,000||Not Required||No|
|Medium Personal Loan||$2,100 – $4,600||Optional||No|
|Large Personal Loan||$5,000||Often Required||No|
So if you after a broker who can help with an interest only loan, shoot us a message and we can make the introductions for you. You can also find out more about our standard products and services on our home page.Apply Now
Since founding Nifty in 2016, Bell has continued to make waves within the local financial sector for his continued ambition and willingness to adopt emerging technologies.Read More
$5,000 - $10,000
$2,001 - $4,600
$300 - $2,000
* Not applicable. Small loans do not charge an annual interest rate.
** WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Different loans may include other payable fees and charges. All fees and charges will always be displayed on your loan contract.