Firstly, what is an Interest only loan? This is a loan option in which you pay only the monthly interest. The result of course is that you do not pay anything off the principle, so the amount you borrowed never reduces.
Why would you do that? For most people paying of a home loan is their goal. Under some circumstances that is exactly why you would take out an interest only loan.
Imagine you had a loan on your home. I know, many of us don’t have to imagine, it’s reality. You live in it and are paying Principle and Interest so that one day you will pay it off and be debt free. Wouldn’t that be a great feeling!
At some point you may decide to purchase an investment property. It can be a great way to use the equity you have accumulated in your home through paying down the loan and rising property values with the aim of building wealth.
So here’s the interesting part. Interest on an investment property is tax deductable. Interest on your owner occupied home loan isn’t.
You could be better off paying your non-deductible owner occupied home loan more quickly and leaving the investment debt for now.
You can achieve this by taking an Interest Only loan over the investment property and use the extra that you would have paid off the principle to pay off your owner occupied, non-deductible home loan more quickly.
This can be an effective strategy BUT you need to have the discipline to pay the extra off the non-deductible loan. It really doesn’t help if you spend the money elsewhere.
This isn’t for everyone and definitely depends on your circumstances. If you are considering an Interest Only, or any home loan, talk to a Credit Advisor/ Mortgage Broker first. They may suggest involving other professionals such as your accountant.
It is a big decision involving a lot of money, you want someone who can help you get it right.
John Gill is a Mortgage Broker and a member of the Mortgage and Finance Association of Australia (MFAA). He holds a Diploma of Finance and Mortgage Broking Management and is a member of the Credit Ombudsman Service limited. John is also a member of AFG – the Australian Finance Group Limited, one of the largest broker groups in Australia.
John is the owner and director of Mortgage Scope Pty Ltd, the Home Loan Specialists.
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