What is an Interest Only Loan Used by Investors?
In Australia, and where the property market is currently experiencing a rapid increase in demand, it’s not uncommon to find other types of buyers outside of first time property owners. These buyers can include property developers – those that plan on building homes to sell on, as well as investors and those that may already own a house and wish to purchase another to maximise their future finances.
What is an interest only loan used by investors?
When it comes to lending their money, the majority of banks in Melbourne and Sydney will be more than willing to consider applications from reliable borrowers. These borrowers will often be required to demonstrate a good track record of meeting their repayments, as well as boasting a pleasing credit score and meeting other specifications and expectations. First time buyers can benefit from regular mortgages, whereas developers may want to pursue construction loans instead.
Investors on the other hand will often be able to secure their loans by using their own property assets as collateral. This may not seem like the ideal solution; but for those that can guarantee to keep up with their repayments (such as home owners that receive income to cover their costs via rent), then most banks will propose fairer terms to get these types of reliable customers on board.
Which types of loans can be the most appealing for investors?
One of the most appealing loan types for investors in specific is referred to as an interest only loan. As the name might explain, the main part of the repayment relates to covering the cost of interest in specific. What this means is that in some cases, a reliable borrower could approach a bank and apply for the cash to cover the cost of their new home; whilst signing up to much fairer repayment plans.
What are these repayment plans?
In the majority of cases, an interest only loan will allow the borrower to literally repay the interest on their loan instead of meeting other repayment requirements. For instance, if the borrower wanted to receive $400,000 from a bank and both parties agree on a 5 year fixed rate of repayment; the property buyer won’t need to repay any of the $400,000 for 60 months – allowing them to cover the cost of any interest that is accrued each month instead.
And after this 5 year period, the $400,000 can start to be paid off allowing the buyer to manage their finances, save up extra cash ready for their repayment plan to begin or so on. This type of loan can be especially beneficial for investors as it’s not uncommon for certain individuals to purchase properties, spend several years renovating and upgrading them, and then reselling them at a profit; allowing them to cover the cost of their loan and still enjoy a profit.