The Only Time Interest Only Repayments Make Sense

For years, whenever I sat down with a client to discuss loan repayments, a general rule of thumb always applied…

If the property was owner-occupied, it was best to have principal and interest repayments, as the interest attached to the loan was non-deductable.

Likewise, if the property was an investment, usually interest only repayments would apply as the interest is tax deductible so it made sense to focus on paying down your non-deductible debt first.

Rates for both options were the same so that was about as much thought, as most people would give it.

However, since APRA introduced their measurements in late 2014 to assist with normalising the housing market, more thought now needs to be given as to whether someone should have principal and interest repayments or interest only repayments.

I’m sure you’re now aware that interest-only loans now come with a higher interest rate compared to principal and interest.

For the most part, I now take the view that all loans need to be paid down eventually, so if you’re incentivised with a lower interest rate, it makes sense to opt for principal and interest repayments.

However, there is one time I will always instruct my clients to go for interest-only repayments – cash out loans.

What is a cash out loan?

Let’s say you own an owner-occupied property and after a few years you’ve paid a bit of your mortgage off and the property has increased in value.

If you were looking to purchase an investment property, one option would be to access the improved equity by obtaining a new loan, secured against your owner-occupied property.

This loan would serve as the deposit plus costs for your investment property and then another loan would be obtained and secured against the investment property.

From a finance perspective, what I would do is two applications, one for the new loan against your owner-occupied property and the other a pre-approval for the new investment property.

When applying for these two loans, it’s important to have the new loan against your owner-occupied to settle before you find the investment property as you’ll need to use this money to pay for the 10% deposit.