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CibbuanoAdvantages of Interest Only Loans
July 17th 2006 00:27
I introduced the idea of an interest only loan on Friday’s post. Today, as promised I’m going to continue the discussion and look at some of the pros and cons of taking out an interest only loan. Since real estate has become so expensive in the densely populated areas of Australia, it is becoming harder for the younger generation to get into the real estate market. The cost of repaying a traditional mortgage will take out a fair chunk of the weekly pay check and once taxes and upkeeping costs are budgeted into the annual cost of keeping the property, the appreciation in your real estate investment is relatively modest in the short term. An interest only loan offers a way of reducing the mortgage bite from the weekly pay check. The theory is that it frees up more money to be invested in shorter term, higher earning investments. Thus you can let your property appreciate in value at its slow and steady rate and in the meantime invest in short term more volatile investment options with higher returns. In a nutshell, the interest only mortgage is going to be a success if you can turn a greater profit from channeling spare money into other investments. Conversely, if you don’t yield a higher rate of return from your other investments or worse still use the lower mortgage repayments to live a life of holidays and easy living, be prepared to be financially crippled in thirty years when your loan expires.
The advantages of an interest only loan are;
1) Lower repayments. How you spend the spare cash which results from lower repayments is up to you but the main principle is that the pressure is on to make sure that money is appreciate at a greater value than the price of your property. Some invest in shares, offshore and others reinvest in the property and look to increase its value at an accelerated rate. You should be very confident that you’ll be able to consistently exceed maintain a higher rate of return than that calculated for a traditional mortgage option.
2) Cuts the cost of buying a residential investment property. This is a short term advantage but it does allow people to get into the property game who may not necessarily be in a financial position to afford a full mortgage. This is especially true in Australia’s densely populated regions where the cost of living and real estate prices are highly inflated. Unfortunately, as we’ve become more of a consumerist society, typical expenses have increased and budgets have blown out. An interest only loan takes off some of the pressure of meeting higher loan repayments. If you are low on funds and cash flow, but are confident that in the future your income stream will become better, an interest only loan will enable you to get into the property game a bit earlier.
Of course, the advantages and assumptions of these two advantages include a lot of risk. With the first option, you need to make sure you have the discipline and diligence to invest your spare money wisely. The second advantage makes the rather large assumption that your financial situation will improve in the long term. This is an improvement that you’ll want to see realized relatively quickly and have some sort of assurance of. Hedging your bets on a glamour breakthrough in Hollywood within the next 20 years is not a wise strategy backing up an interest only mortgage. Tomorrow I’ll look at the ugly side of interest only loans.
The advantages of an interest only loan are;
1) Lower repayments. How you spend the spare cash which results from lower repayments is up to you but the main principle is that the pressure is on to make sure that money is appreciate at a greater value than the price of your property. Some invest in shares, offshore and others reinvest in the property and look to increase its value at an accelerated rate. You should be very confident that you’ll be able to consistently exceed maintain a higher rate of return than that calculated for a traditional mortgage option.
2) Cuts the cost of buying a residential investment property. This is a short term advantage but it does allow people to get into the property game who may not necessarily be in a financial position to afford a full mortgage. This is especially true in Australia’s densely populated regions where the cost of living and real estate prices are highly inflated. Unfortunately, as we’ve become more of a consumerist society, typical expenses have increased and budgets have blown out. An interest only loan takes off some of the pressure of meeting higher loan repayments. If you are low on funds and cash flow, but are confident that in the future your income stream will become better, an interest only loan will enable you to get into the property game a bit earlier.
Of course, the advantages and assumptions of these two advantages include a lot of risk. With the first option, you need to make sure you have the discipline and diligence to invest your spare money wisely. The second advantage makes the rather large assumption that your financial situation will improve in the long term. This is an improvement that you’ll want to see realized relatively quickly and have some sort of assurance of. Hedging your bets on a glamour breakthrough in Hollywood within the next 20 years is not a wise strategy backing up an interest only mortgage. Tomorrow I’ll look at the ugly side of interest only loans.
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