As you shop around for a new home, you may hear the term ‘interest only loan.’ For people who are familiar with the traditional mortgage loan structure, this term may well be unfamiliar. In most cases, homebuyers make principal payments and interest payments simultaneously. The principal payments pay off the bulk of the mortgage loan and build the buyer’s equity in the home over time. The interest payments, meanwhile, cover the interest that compounds on the principal loan over time.

If you decide to pursue an interest only loan in Perth, you will be opting for a mortgage that effectively takes the principal payments out of the equation—at least for a period of time. As you might expect, this option brings both advantages and disadvantages, which you will have to weigh on an individual basis to decide whether a no interest loan is right for you.

The Pros and Cons of Interest Only Loans

At Peter Dunn Finance, we help clients secure interest only loans in Armadale, Fremantle and South Perth. We can also assist with other types of home loans—including more traditional mortgage loans. To help you decide what type of loan is right for you at this juncture, we have compiled a list of some of the pros and cons of interest only loans below.

Let’s start with the advantages. Usually, an interest only loan remains in its ‘interest only’ incarnation for the first five to ten years. After that point, the owner either refinances the mortgage puts down a lump sum (essentially a second down payment) or begins paying principal on the loan. During those first few years, though, the owner is only paying interest on the loan, which means lower monthly payments than you would get from a traditional mortgage on the same house. As a result, buyers will often use interest only loans if they 1) want to buy bigger or more expensive homes than they can currently afford, or 2) only plan to be living in the home for a short period and would rather save money than build equity.

That last point leads us to the main disadvantage of choosing an interest only loan: you aren’t building equity. If you plan to own your home for an extended time, a traditional mortgage is preferable to an interest only loan, because you are paying off the principal as well as the interest. As such, you end up owning part of your home and being able to get money out of it when you sell. Opting for an interest only loan in South Perth or Armadale is almost more like renting than buying because you are paying to live in your home without building equity—at least beyond the equity you purchased with your down payment.

Some homeowners can take this drawback and turn it into a positive. When you aren’t paying principal, you are saving money, which means that you have more cash available to invest or save over and above your living expenses. Especially for short-term buyers, it’s possible to see bigger returns by investing that money than by building equity with it. It all depends on the person, the house and the situation.

Get Advice on Interest Only Loans in Perth

Are interest only loans right for you? At Peter Dunn Finance, we would be happy to sit down with you and try to answer that question. For advice on interest only loans in Fremantle, South Perth, Armadale and throughout the Perth metro area, call 0427 947 480.