The interest-only mortgage involves a borrower taking a mortgage, and they are required to pay the resulting interest on that loan first for a given period. The principal will be repaid either in subsequent payment or in a
lump sum at a specific date. It is a very common process in money lending.
So necessarily in this type of home loan or personal, for the initial repayment period/years, only the interest is paid as opposed to the norm where you pay both the interest and principal at the same time. These interest repayments could be made throughout the entire loan period or for a specific time. The good thing with this type of mortgage is that you will be making lower payments for some time, which could mean you can invest your money somewhere else in the meantime.
Advantages of taking Interest-only Repayment Options:
Low monthly payments:
If anyone takes these options, it can help to structure low monthly repayments in a hard time. A person servicing an interest-only mortgage usually pays low repayments for the loan. That is because they will be servicing only the interest, which is, of course, not high. The other bank loan repayment strategies involve repayment of the principal and interest at the same time.
It can be very handy to make an effective investment strategy. For a person that has a growing stock portfolio in any financial market, they would not be willing to let go of their investments to finance the mortgage. You could also be having sufficient cash flow to repay the mortgage, but you plan on saving it for retirement purposes or want to invest in equity. The interest-only mortgage will be convenient in such scenarios. If anybody chooses these options, they can get a flexible term to repay.
It can help a person to rising income too. Well, taking a loan as a student would be overwhelming since all your cash is spent on tuition. However, if you just cleared school and already secured a job where you are sure of a paycheck every month, then you can take this mortgage and save yourself the home purchase cost.
You can secure a bigger house:
Many property investment experts said it can be a handy way to secure a bigger house buy saving a deposit. The interest-only mortgage will be beneficial if you are expecting lots of cash flow in the future. However, you should also assess whether the home you are planning on purchasing can be easily financed now before you receive the huge lump sum in the future. The loan payments will shoot afterward, and you will have to remit more copious amounts.
Pay scheduled Equity:
Many of the interest-only mortgages will not restrict you from adding cash on the interest repayment to reduce the principal. Such as act will lower the payment afterward when repaying the principal. It is helpful when the guarantor has varied income every month. That means that in some months you can pay less than the required while in some you pay more.
Rising housing prices:
A property investor can make a good amount of money by using this technique. They can reschedule interest-only loan & invest saving to buy another property. In increasing market prices for houses, several investors will take in the interest-only option and purchase the property. They will then sell that property after a few years before the principal repayment period. They will make some profit from such an investment. However, this is ideal for investors who are risk-takers and can take any setbacks that may occur in the future. Supposing the house prices do not hike and you fail to secure someone to purchase the home? You could end up selling it at a loss or being declared bankrupt since you were unable to finance the principal.
When you pay further installments, they go to the principal. That means that when paying the principal, you will pay in less monthly installments, but for the other loans, even if you overpay some payments, the monthly installment for the principal is not reduced in any way. With reduced monthly installments you are sure to even continue overpaying the installments. Hence you will have an easy time repaying the loan as you service your other investments.
The amount paid during the period for repayment of the period qualifies to be tax-deductible. That technically means that this amount shall be deducted from your taxable income. It is an advantage in that you will pay less in terms of taxes and probably use the cash for some other investments.
During the COVID-19 pandemic, the New Zealand government announces mortgage holiday & interest-only loan options for all citizens & residents. It can give at least a hope not to stress during a global pandemic. If any of them facing financial difficulties or stress during COVID-19, they should contact to their financial advisors or bank to get this type of financial relief.