Should your repayments be Interest Only?

Should your repayments be Interest Only?

Peter Oates Peter Oates
2 minute read

Interest Only Repayments 

 

Interest Only repayments have been in the spotlight for some time now. It is important to understand the benefits and negatives when it comes to lending with interest only repayments.  

The Benefits: 
  • Clients do not pay down deductible debt if their lending is Interest Only, which can lead to greater tax effectiveness, but you must speak with a tax professional regarding this. 

  • A client’s repayments are lower allowing them to allocate more funds to other financial goals. 

  • Forms part of the debt recycling strategy if a client has both deductible and non-deductible debt. 

The Negatives 
  • The interest rate for Interest Only repayments are usually higher than P&I repayments. 

  • Clients do not pay down their lending, potentially leaving them with a higher total interest payment over the life of the loan. 

  • Clients may have a higher P&I repayment when their Interest Only period ends than if they had been P&I for the full term of the loan. This is because if they take out a 30 Year Loan Term and decide to have the first 5 Years Interest Only, the lender will then require them to pay off the entire loan in the 25 Years left after their 5 Year Interest Only period ends. So, the P&I repayment will need to be higher for the 25 Year Period than it would have been for the 30 Term. 

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  • A client’s borrowing capacity will be lower if they have an Interest Only Term, because in the long term their repayments will be higher and total interest will also be higher. Due to this the lender will most likely lend a client less funds the longer the Interest Only Term. 

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In summary, Interest Only provides short term lower repayments, which may be more tax effective.  But the rate will be higher, the principle of the debt will not reduce, P&I repayments will be higher later, a client may pay more interest over the life of the loan and most lenders will lend less money. Please talk to Lendtribe regarding Interest Only repayments to confirm if this is good strategic option. 

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