Interest Only Loans
An interest-only loan is a loan in which, for a set term, the borrower only pays the interest on the mortgage through monthly payments for a term, not the principal. With an interest only mortgage, you pay only interest on your payments for a specific period of time (typically 5-10 years) while your principal will remain unchanged.
Interest-only loans maximise your cash flow and minimise your payments, allowing you to invest it towards other things such as renovations, retirement, or college tuition. An interest only loan can seem like a great idea at the time - but there are plenty of risks involved in buying a property with a loan that fails to pay off any principal.
Interest only loans are popular with property investors, as they allow you to minimise your mortgage payments in the short-term, while your property value grows in the long term. Interest only loans are ideal for covering a short term situation. They can be useful for first-time home buyers because it allows you to defer large payments until your income grows.
One of the most common misconceptions of an interest-only home loan is that you're not building equity in your home, which may not entirely be true. Homes in the U.S. have been appreciating around 5% each year, so there is a chance that even if you're not paying the principal amount, you're still building equity in your home through appreciation.
