The name says it all. Repayment of the principal is deferred for an agreed period (usually 1-5 years) and during this time you only pay the interest charges which results in a lower minimum payment as there is no allocation for principal. At the end of the interest only period – usually one to five years – you must start making Principal and Interest Repayments over the remaining term of the loan, although some lenders will also allow you to extend the interest only period.

Pros:
  • Payments are lower during the interest only period offering you time to adjust or freeing up money to renovate or improve the property.
  • For investment properties, it lowers payment commitments enabling you to maximise payments any non-deductible debt
  • Maximises mortgage rebates
Cons:
  • Payments increase at the end of the Interest Only period
  • Overall interest costs wind up more expensive than paying Principal and Interest
  • Many lenders assess your ability to repay the loan only on the principal and interest repayments over a shorter repayment term which can reduce your borrowing power

 

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