A home loan repayment usually consists of
The principal – the amount you borrow
The interest – the amount the lender charges you
With an interest only loan, you will only be paying the interest off for a set amount of time. At the end of this period, the repayments increase and the loan converts to Principal and Interest repayments.
- Lower repayments during the interest-only period could help you save more or pay off other more expensive debts.
- May be useful for short-term loans, such as or a .
- If you’re an investor, you could claim higher tax deductions from an investment property.
- The deposit and interest rates are typically higher than those on a traditional loan (interest and principal)
- The repayments increase after the interest-only period which may not be affordable
- For the first five to ten years of the loan, your equity will not grow (unless you make extra payments)