Interest Only Investment Loan
An interest only investment loan is particularly valuable to a property investor who can see the property gaining in value over time, with this increase in equity ensuring a profit is made on the eventual resale of the property. In the meantime the investor has had his or her monthly repayments restricted to the paying off of the interest component of the loan only, therefore saving the investor a lot of money, while at the same time increasing his or her cash flow.
An interest only investment loan is therefore of value to an investor because:
- It is easier to work out the real return that you are getting for the property by clearly separating the interest from the principal.
- You will benefit financially from the tax deductions you can claim on the making of the interest only payments as there are no tax deductions allowable off any payments made off the principal.
- And obviously your monthly repayments will be considerably lower than they would have been if you had have been making both interest and principal reducing repayments.
Length of interest only investment loan terms.
It is common for investors to take out an interest only investment loan for a period of five years however many lenders will allow such a loan to run over 10 years or more.
There are two big advantages in having the interest only investment loan running over a longer period, these are:
- The longer the period the interest only investment loan runs the longer you will enjoy the benefit of being able to deduct the entire repayment for taxation purposes.
- The longer time given for the loan to run, the more likelihood there will be of the property realizing a greater resale value. This may be true in times of rising property values but beware if a downturn occurs through some unforeseen economic change taking place.
Positive and negative gearing as it relates to an Interest Only Investment Loan.
Positive gearing occurs when you can obtain sufficient rental income from your investment property to exceed the costs involved of owning the property after the interest, fees and maintenance costs have been deducted.
Negative gearing occurs when the reverse occurs. For example when the costs involved are more than that received in rental payments. Negative gearing has the advantage of allowing the investor to claim any overall loss as a taxation deduction.
Interest only investment loan amounts.
An interest only investment loan can be obtained for up to 95 per cent of the value of the property being purchased. Some lenders will loan you the whole 100 per cent amount of the investment property value. You can, of course, borrow up to 110 per cent of the property’s value if you cross collateralize with another property that you own.
The amount of principal owing remains the same throughout the entire term of an interest only investment loan. You will only have to pay the principal, in full, when you sell the property, or of course, when the term of the loan expires, whichever occurs first. It is then that you will experience a profit through capital gain ( if you have chosen wisely).
In the meantime your rental payments received for the lease of the property should have paid the interest on borrowing the loan in the first place. If not, your negative gearing arrangements should have returned you enough in taxation deductions to enable you to come out in front.
Interest only investment loans have been a part of the investment scene now for over 90 years. Such a loan being particularly valuable in times of rising property prices as the inflated value of the home takes care of the investors equity interest in the property.
During this period, the fact of not having to pay any money off the principal, the investor has the added benefit from creating a greater cash flow.
Short term benefit.
Interest only investment loans are normally only available for a reasonably short period of time, from 1 to five years but terms of up to 10 years are sometimes available.
At the expiration of the interest only period the loan will revert to a variable or fixed interest and principal investment loan.
It is at this time that some investors put their investment property on the market and gain the benefit of the capital growth of the property during interest only repayment period.
Lower repayments.
Because of the fact that an interest only investment loan only requires payment off the interest the loan has attracted, the monthly repayments are much lower as the following example points out:
- A $300,000 interest only investment loan attracting an interest rate of 8 per cent will require an annual repayment of $24,000. ($2,000 a month).
- A $300,000 principal and interest investment loan at 8 per cent interest will require an annual repayment of $27,780. ($2,325 a month).
- This is a difference of $325 a month or $81,25 a week in a four week month.
Inflation means higher gains.
The secret in being successful in taking out an interest only investment loan is of course the movement in house prices during the life of the loan.
Inflation in the economy is fought hard by governments as rising prices in turn demand rising wages and it can easily spiral out of control but for the canny investor it can mean the making of a profit or not.
Considerable savings.
An investor taking out an interest only investment loan can save money each month because of lower repayments off the loan he or she has borrowed.
- If the inflation rate has risen at a modest 3 per cent during the year, and property prices have kept pace with the inflation rate, the investors equity in the home will have increased by $9,000 or $750 a month.
- Historically house prices have been rising at a rate of 9 per cent per annum and in 2003 they rose by a massive 20 per cent.
In this manner the natural growth in the economy far outstrips the cost of paying off the principal and the loan will in effect be actually decreasing.
Tax deductible.
A further benefit in taking out an interest only investment loan is that the interest component of your investment loan is actually tax deductible because the loan will be regarded as an income producing asset loan. This actually means the whole repayment you will be making during the life of the interest only investment loan is tax deductible, a great benefit when taking into account the gains made through negative gearing.
Such a loan is therefore particularly valuable in times of rising property prices as the inflated value of the home takes care of the investors equity interest in the property. During this period, the fact of not having to pay any money off the principal, the investor has the added benefit from creating a greater cash flow while at the same time receives a taxation benefit and an increase in his or her capital holding through the rising property value.
Related posts:
- Specific differences of taking an Investment Loan in Australia vs the World
- 4 Key Considerations When Buying an Investment Property
- Best Investment Loans
- Westpac Fixed Rate Investment Property Loan Interest Only in Advance
- Interest Management Loans
- Interest Only Mortgages – How They Work
- Avoid Margin Property Investment Calls in an Uncertain Environment
- How Investors Can Benefit from Rising Interest Rates
- Investment Property Tips & Guides
- Commonwealth Bank Interest In Advance Fixed Rate Investment Home Loan
Top Home Loans
| Home Loan | Details | Interest Rate (p.a.) | Comp Rate^ (p.a.) | App Fee / Ongoing Fee | Max LVR | Min & Max Borrowing | |
|---|---|---|---|---|---|---|---|
 Loans.com.au - Dream Catcher | A home loan offer with a $0 application fee and one of the lowest available home loan interest rates. | 5.85% | 6.21% | $0 / $375 | 80% | $50,000 / $750,000 |
 
|
 Bankwest Online Home Loan | A low interest rate home loan with a $0 application fee and ongoing maintenance fees. This offer is exclusively available by applying online. | 5.97% | 5.97% | $0 / $0 | 80% | $100,000 / $1,000,000 |
|
 Illawarra Home Loans Bank Beater Home Loan | A low variable rate, beaten down even further by 0.05% p.a. after 5 years. | 6.07% | 6.35% | $0 / $345 | 90% | $250,000 / $1,000,000 |
|
 State Custodians Mortgage Company Standard Variable Offset Loan | Awarded Mortgage of the Year 2012 – this multi-award winner features 100% offset and a loyalty 0.25% rate drop after 5 years. | 6.02% | 6.23% | $0 / $345 | 95% | $150,000 / $1,000,000 |
|
Ask A Question