Today, we will discuss the topic of interest-only loans. Some people already have multiple loans, but they still choose the principal and interest repayment on each loan. They believe they are at least paying down the principal, which will help them pay it off faster and save interest. On the other hand, we have clients who insist on interest-only loan. Is interest-only good or bad? There are both pros and cons to taking out an interest-only loan. The answer is neither yes nor no; it depends on your situation and the purpose. Today, let's discuss the benefits of interest-only lending, and we can discuss the disadvantages next week.

There are four reasons why people should get an interest-only loan.

Cash flow

Cash flow is the number one priority. It can't be more relevant in the current environment. Interest rates have increased so much over the last 12 months. Many people feel stressed about their loan repayments. Many of you may be paying twice or more than before, that's put significant stress on your cash flow. This is especially true for those who choose principal and interest only. Generally, if you are only paying interest, the repayment difference will not be as significant as if you were paying both principal and interest. As a result, your cash flow can have some relief. If your cash flow becomes a concern, you may need to consider selling the assets, et cetera. As long as you keep up with your loan repayments, you will get through the crisis. Eventually, the interest rates will go down, and your property values will continue grow.

Tax efficiency

In second place The 2^nd reason is the tax efficiency . That interest cost can be tax deductible when you have a loan for business purposes, such as funding a business by topping up your home loan. Therefore, you pay less tax. Same for investment property. If you have an investment property purchased before March 2021, you should be able to deduct interest until 2025. Hopefully, if we change government next year, the rental property interest deductibility rules may  be restored. 

Paying off high Interest loans faster

Number three, interest-only repayment can further improve cash flow by paying off high-interest rates loans first. . You may have unsecured loans such as a personal loan, a car loan, or an outstanding balance on your credit card or other consumer cards. It is better to use interest only on your home loan first so that we can concentrate on paying off these high-interest rate loans with our cash flow. As a result, we can save a significant amount of money.

Asset protection

The last point is asset protection. We recommend that you pay off one loan at a time if you own multiple properties and have multiple loans. Once you have paid off that loan, you will be able to discharge the property. To ensure that all your cash flow is used to pay off the first loan, keep other loans on interest only while you are paying for one property. Most people pay off their family home first or a smaller loan since they can pay it off quickly. By doing so, you can protect your assets. Because banks cannot force you to sell it if anything goes wrong with other loans.  Also, the mortgage-free property can be used as security to borrow money from other sources that outside the banks scale

These are the four benefits, and hopefully, this article will assist you in determining if this is a suitable solution for your particular situation. It is important to note that if you have a principal and interest loan and would like to change it to an interest-only loan, or if you already have an interest-only loan and would like to extend it for a further period, you will be required to submit a full application, just like applying for a new loan, you will be subject to  the current lending policies. Therefore there is no guarantee it can be approved.. However, we will be glad to review it for you and let you know if we can do so. Hopefully, you have gained some insight into interest-only loans, what it is and what the benefits are. Next week, we will discuss the situations in which interest-only loans might not be a good idea. See you next week.

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.