Property investment: Could an interest-only loan be right for you?

By the resi financial blog team, 06 January 2014

What is an interest only loan

There are a wide range of investment loans available for those interested in undertaking the challenge and becoming a real estate investor in the near future. One of the more popular ones for building a portfolio is called an interest-only loan, and could be the perfect thing for investing.

Regular home loans work on the basis that as you make repayments, you chip away at the remaining mortgage balance as well as paying a certain percentage of interest each time. As your balance begins to decrease, so too does your interest repayments.

However, an interest-only home loan varies from the norm in that the only payments you make on the loan are the interest. Fundamentally, this means that you aren't making any progress on the actual balance of your loan, while paying the same amount of interest each repayment period.

This may seem impractical for homeowners who are aiming to own their property completely and become debt-free eventually. However, for investors, this type of loan can be the perfect solution.

The concept behind using an interest-only home loan for property investment works by basing it on the capital growth of the property. While you're making interest repayments on the original price of the property, the actual real estate should be increasing in value.

Therefore, when there has been a decent amount of growth, the investor simply sells the property for the increased value, pays off the loan in one swoop and pockets the rest as a profit.

Naturally, there is a degree of risk involved with this. If you purchase a property that doesn't experience value growth, you could find yourself paying the mortgage out of your own finances.

Therefore, it's imperative to do in-depth market research before committing to an interest-only home loan, as well as speak with a financial professional about the best possible investment loan for your personal situation.

Categories: Home Loans, Property Investment