There are a range of different types of loans available in New Zealand. From a broader perspective, there are two types. The repayment loans, and the interest only loans. Repayment loans are typically where the homeowner repays the principal (the amount borrowed to purchase the property) and the interest that the lender charges for the loan. But an interest only loan works a little differently.
What is an Interest Only Mortgage?
An interest only mortgage is different from a regular mortgage, in that it is a fixed loan where the borrower pays off the interest charged on the loan, but not the amount of money used to purchase the property. In other words, you would be paying off the outstanding balance of your loan as it accrues, but not the principal (the amount borrowed). You also must pay it off in a specified period of time. It is important to note that an interest-only loan isn’t typically cheaper than other types of loans and will often cost you more in the long run. This is because you are not paying the principal off, which generally reduces the interest rate over time.
Interest only loans are generally only available for a short period of time to make sure you can pay it off before the maturity date.
Property investors are the home buyer who most commonly choose an interest-only loan due to the lower repayments that they typically have covered or partially covered by their renters, meaning, they can usually pay their mortgage off by the period end.
Pros of Interest Only Loans
Freedom of repayment: With an interest only mortgage, you can make payments whenever you like, without penalty. You just must pay it off by the end of the loan period. This might be a good option for homeowners who have a varied monthly income and wish to pay different amounts towards the loan each month.
An investment strategy: Payments for interest only mortgages are generally cheaper than other forms of loans because they don’t include the principal. For investors, who know they can pay the loan off by the end date, this is a great way to save money which you could use for other investments.
Cons of Interest Only Loans
There is no growth in equity: Unless the value of the home increases, or extra payments are made, you will not see equity growth because interest only loans are not designed for growth in equity. If this happens, then the borrower would owe money to their lender after the mortgage period ends.
You may have to sell or remortgage: If you can’t pay what was borrowed under the interest-only loan by the end of the term, then you may either have to sell the property, or enter into another mortgage.
Talk to Us at Money Compare
If you are unsure about whether an interest-only option might be right for you, or if you want to explore the other loan options, the Auckland-based team at Money Compare can help by providing obligation-free, bias-free advice for FREE. You can either jump on the website or call 0508 226672 to speak with a friendly human from our customer support team
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