Why some interest-only borrowers are keen to switch
- Jim Yanevski
- Nov 19, 2018
- 3 min read
Updated: Nov 17, 2023
New government regulations mean interest-only loans are on the decline. Given the changes, it may be time to reconsider your own loan structure.
Interest-only loans have been a popular option for many homeowners and investors in recent years. These loans allow borrowers to only make interest payments for a set period of time, before they are required to start paying down the principal as well. However, there are a number of reasons why you might want to reconsider an interest-only loan, even if you have already taken one out.
The benefits of interest-only loans
There are a few reasons why interest-only loans can be appealing. First, they can help you to get on top of your initial homeownership costs. When you first buy a home, there are a lot of upfront expenses, such as stamp duty, legal fees, and moving costs. An interest-only loan can help you to free up some cash flow so that you can cover these costs.
Second, interest-only loans can be a good option for investors. Investors who use interest-only loans can deduct the interest payments from their taxable income, which can save them money on their taxes.
The drawbacks of interest-only loans
While there are some benefits to interest-only loans, there are also some drawbacks that you should consider. First, interest-only loans can be more expensive in the long run. This is because you will be paying interest on the full amount of the loan, even though you are not actually paying down the principal. As a result, you will end up paying more interest over the life of the loan.
Second, interest-only loans can make it more difficult to build equity in your home. Equity is the difference between the value of your home and the amount of your outstanding mortgage. If you have an interest-only loan, you will not be paying down the principal, so you will not be building up equity as quickly.
Third, interest-only loans can be risky if the housing market takes a downturn. If the value of your home falls, you could end up owing more on your mortgage than your home is worth. This could make it difficult to sell your home or refinance your loan.
Should you switch from an interest-only loan?
If you have an interest-only loan, you may want to consider switching to a principal and interest (P&I) loan. P&I loans allow you to make payments on both the principal and interest, which means that you will be paying down your loan more quickly. This can save you money in the long run and make you less vulnerable to financial difficulty if the housing market takes a downturn.
How to switch from an interest-only loan
If you decide that you want to switch from an interest-only loan to a P&I loan, you will need to contact your lender. Your lender will be able to tell you what the terms and conditions of a P&I loan would be for you. You will also need to make sure that you can afford the higher monthly payments.
Conclusion
Interest-only loans can be a good option for some people, but there are also some risks involved. If you are considering an interest-only loan, you should carefully consider the benefits and drawbacks before making a decision. If you already have an interest-only loan, you may want to consider switching to a P&I loan to save money in the long run.
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