If you are oscillating between an interest-only loan or a principal and interest loan for your investment property, you are probably already deep in the research. We explore some of the benefits and reasons why investors use interest-only loans to help you make a decision.
An interest-only loan is a loan that only requires you to repay the interest portion of the loan for a set period of time, usually up to five years before the loan reverts to a principal and interest loan.
Interest-only loans are popular with investors who want to maximize their cash flow while reducing expenses. But is an interest-only loan right for you and your investment strategy?
Advantages of interest-only loans
Your refunds are lower
Since you are not repaying any debt on the property, your loan repayment amounts are lower because you are only repaying the interest portion of the loan. This is arguably the biggest advantage of an interest-only loan and one of the main reasons investors opt for this type of loan because it gives them certainty of repayment during the first few months. years when trying to find tenants and minimize other start-up costs.
Interest-only repayments also allow investors to maximize their cash flow by freeing up the principal amount of each repayment for other uses, like saving a down payment for their next real estate purchase or paying off debt. .
“Recently we have seen a number of our clients opt for principal and interest because of the lower rates available. That being said, more and more of our investor clients are opting for interest only to manage their cash flow, and renovating especially during these foreclosure times, ”said Marie Mortimer, Managing Director of Loans.com.au (pictured) .
Image provided.
"We notice that in general people use their extra funds and cash to renovate and complete cosmetic upgrades to their kitchen or bathroom, in order to add value to their home. property. "
It's important to remember that all good things come to an end and that after your OI period expires (usually after a maximum of five years) your repayments will increase over time. as you start to pay off the main part (the amount you borrowed).
Tax benefits
Because you do not repay the principal amount during the interest-only period, the full amount of interest may be deducted from your income.
Some investors choose to maximize their interest repayments and use the interest tax deductibility on their loan repayments. In some cases, you can choose to pay the interest annually in advance to reduce your taxable income.
Why choose a single interest loan for your investment property?
An interest-free loan means the rent will cover most, if not all, of your monthly mortgage payments. This means that you can direct any extra money towards other things, like saving up for your next investment property purchase, renovations, or paying off other debts. While these cheaper repayments only last a few years, the savings in the first few years of the mortgage can really pay off if you try to cut down on your upfront expenses and maximize your cash flow.
Interest-only loans are also useful for tax purposes. All interest accrued on the interest portion of the loan is tax deductible. If you are only making interest refunds, you can claim the full payment on your personal tax return.
Many investors choose interest loans only because they do not intend to hold the property for very long and rely on capital growth to build up the equity in the property. This is called a compound growth strategy.
Assuming the property's value increases sufficiently during the interest-only period, an investor can sell it, pay off the principal, and still make a profit. But if the property's value doesn't increase or decrease during the interest-only period, you could end up owing more on the loan than the property's value – known as equity. negatives.
This article has been supplied by Loans.com.au
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