There has been a growing demand lately for interest-only lending among Home Loans Melbourne. According to statistics, interest only loans have risen up to as high as 30% over the past 6 years. If you have been contemplating on joining the others and apply for such type of loan, you need to be fully aware of the risks involved and the precautions you need to take.
What Is It
Interest only loans are largely offered by investors to allow borrowers to not be obliged to pay back the loan principal over 5 to 15 years. This means, you only have to worry about the monthly interest rates, which may initially be lower.
What You Need To Know
However, don’t get fooled by this seemingly attractive offer of lower costs. As the saying goes, “If it’s too good to be true, it probably is.” There are risks involved in such kind of home loans Melbourne.
Interest-only loans are popular among investors for a reason – they are able to deduct interest payments against other income. It is the reason why it has become a popular type of home loan Melbourne. It’s the investors who are driving the market.
However, the Australian Prudential Regulation Authority has recently warned about the growth of interest-only lending to owner-occupiers, which it sees as a form of “higher-risk” lending.
The Australian Securities and Investments Commission is also scrutinising the banks to make sure they’re not breaking responsible lending laws in this area.
What Is The Fuss About?
For one, when you only pay for the interest of your loan, you have a higher chance of being in “negative equity” should the prices of properties fall. This means, your debt is larger than what your property is worth.
Compared to paying loan + principal for your home loan Melbourne, you are expected to pay off at least 10% of your loan in the first five years. This gives you a buffer should the prices of houses fall.
It is also important to keep in mind that interest-only home loans Melbourne are offered for a limited time only. After 5 to 15 years, you are expected to pay off the interest + principle.