| You may have heard people talk about interest-only | | | | make a profit when the property is sold. By taking the |
| loans when they talk about their investments. Whilst | | | | funds that you would have otherwise used to pay off |
| the definition of what interest-only loans are is simple | | | | principal amount of your loan and use it to invest in |
| to explain, the reason behind them is something that | | | | another property for instance the return on your dollar |
| has many people scratching their heads. Interest-only | | | | is generally assumed to be more. |
| loans are simply that, loans where you pay only the | | | | As a very basic example, a couple purchase a rental |
| interest expense and do not pay any of the principal | | | | property for $300,000. To accomplish this they borrow |
| amount off the loan. Meaning your loan balance | | | | $200,000 from the bank. The set the loan to |
| remains exactly the same for the term of the loan. | | | | interest-only repayments and as a result make a small |
| Easy! Now why would you do that? Many people | | | | profit on a monthly basis from the rental. They use this |
| from an older or more traditional way of thinking | | | | profit to buy another rental property for the same |
| approach loans as something that you want to pay | | | | amount a year later, borrowing exactly the same |
| back as soon as possible and having full ownership of | | | | amount. So now they have 2 properties worth |
| your asset is paramount. Whilst this may be true of an | | | | $300,000 each and have $400,000 of loans. Over a |
| asset like your personal home for instance, an | | | | period of 10 years (long term view remember) the |
| investment is something completely different. | | | | house values may have doubled (house prices double |
| By having the borrowed funds that were used to buy | | | | approximately every 10 years), now they have 2 |
| the investment property set to interest-only | | | | homes worth $1,200,000 and loans against these |
| repayments, the total expense incurred in operating | | | | homes for $400,000 still. The couple are now in a far |
| that investment is reduced as you do not have to | | | | stronger position than they would have been had they |
| factor in principal repayments on your lending. This is | | | | bought one investment property and had been paying |
| good as it allows your property to become cash flow | | | | the loan off over that time. This does not take into |
| positive quicker, at which time some of that income | | | | account rent increases over that time, which would put |
| can be used to fund the next investment. | | | | the couple in an even stronger position. |
| But what about the loan balance you ask? Most | | | | Interest only loans are not for everyone and I would |
| investors take a longer-term view, especially when | | | | recommend talking to your accountant or financial |
| investing in property. It is expected that over time | | | | advisor before you sign yourself up for one if you are |
| property will increase in value, allowing the owner to | | | | unsure. |