Why should I compare interest-only investment loan rates?
Your mortgage interest rate can play a crucial role when it comes to property investment. If you choose an interest-only loan, you can minimise the cost of repayments in the short term. The lower your interest rate, the less you may need to pay. This may let you enjoy more value from your investment.
When you calculate the cost of a mortgage, remember that the interest rate you start with probably won’t be the interest rate you’ll end with. Even if you start with a fixed interest rate, this will eventually switch back to a variable rate. And variable interest rates may rise or fall, depending on the economy.
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How low could home loan rates go?
With Australia entering its first recession in decades, banks and mortgage lenders are eager to sign up new customers, and are making discounted interest rates available to first home buyers and refinancers. Large and small banks have been slashing both fixed and variable interest rates, and may continue to compete by offering further discounts.
How does an interest-only investment loan work?
A typical mortgage payment goes towards both your loan’s principal (the amount you’ve borrowed) and your interest charges. Over time, these payments will slowly clear your debt, so you can own your property outright.
Some lenders will allow you to only pay the interest charges on a home loan for a limited time. These interest-only payments cost less from month to month, but reduce what you owe.
Most lenders will let you pay interest only on a mortgage for up to five years. A few will allow you to extend your interest-only term for longer.
Some lenders will let you pay extra money onto your interest-only home loan. For example, you could receive a bonus at work or a tax refund, and put these onto your loan. These extra repayments will reduce what you owe on the loan, which can help shrink your future interest charges.
- You can start investing sooner
- You can pay less while enjoying capital growth
- You can maximise your rental yield
- You may enjoy tax benefits e.g. negative gearing
- You’ll pay more interest in total
- You may be unable to afford the revert rate
- The property market may not behave as predicted
- It may be harder to successfully apply
Why do people use interest-only investment loans?
Start investing sooner
As a fresh-faced investor, you may not be able to afford principal and interest payments straight away. While you’re waiting until you can afford P&I, house prices may increase further. This could cost you more and make investing harder.
An interest-only investment loan may let you get a foot in the door sooner. While you manage your interest-only payments, you can try to improve your financial position. This can help you prepare for when your loan reverts to principal and interest repayments.
Pay less while your property’s value grows
Some investors use interest-only loans to buy properties in popular areas where prices are rising. Their strategy is to minimise their short-term costs while their property grows in value. This can help increase their equity through capital growth.
After the interest-only term ends, the investor could sell the property and make a profit. They could also use their equity as security to refinance their loan. They could even try to secure a new loan over another property.
Maximise your rental yield
An interest-only loan can help minimise the cost of your mortgage repayments. This can help you make more money from your property's rental income.
Once the interest-only period ends, and your loan reverts to principal and interest payments, this could change.
If the cost of maintaining your property is higher than the income you receive from it, your property is said to be negatively geared.
While this means making a loss on your investment, the interest charges on your loan may reduce your taxable income. This may let you pay less tax or enjoy other tax benefits.
Australian tax law is complex and may change over time. Consider contacting a financial counsellor and/or a tax accountant before you apply for an interest-only investment loan with the goal of negative gearing.
What are the risks of interest only investment loans?
You’ll pay more interest in total
Because interest-only payments don’t reduce your loan principal, your loan will take longer to pay off. The longer you’re in debt, the more interest may be charged on your loan. This means interest-only investment loans often cost more in total than principal and interest loans.
For example, imagine a 30-year mortgage for $350,000 at an interest rate of 5%. Compare the cost of principal and interest repayments to interest-only payments for five, ten or fifteen years:
|Scenario||P&I loan||IO for 5 years||IO for 10 years||IO for 15 years|
|Monthly repayments during interest-only period||$1,879||$1,458||$1,458||$1,458|
|Monthly repayments after interest-only period||$1,879||$2,046||$2,310||$2,768|
|Total repayments made||$676,395||$701,320||$729,363||$760,700|
|Additional interest paid due to interest-only period||$0||$24,924||$52,968||$84,305|
Being unable to afford the principal and interest repayments
Once your interest-only period expires, your loan will revert to a variable interest rate. Some lenders charge higher revert rates than the variable rates on principal and interest home loans.
This means your home loan repayments could rise significantly when you switch to the revert rate. If you can’t afford these repayments, you could find yourself in financial trouble.
The property market not acting as predicted
If your investment goal is to make money from rental yields or capital growth, or to enjoy tax benefits from negative gearing, you should be prepared for the worst. There’s a risk that your interest-only investment could leave you worse off than you started.
- What if you’re unable to secure tenants and your property sits vacant for a long time?
- What if property values don’t rise in your area?
- What if property values fall, leaving you in negative equity?
Tighter loan restrictions
Interest-only home loans are often considered risky, especially when used for investing. You could borrow more today than you can afford to repay in the future. This means banks and other lenders may be less confident about providing interest-only investment loans.
Some lenders put extra restrictions on interest-only investment home loans. They may charge higher interest rates or higher fees, costing you more money. They may require higher deposits or extra security, making it more difficult to apply. Or they may offer fewer interest-only investment loan options than other mortgage types.
How do I compare interest-only investment loans?
Like other home loans, investment interest-only loans can be compared by looking at a range of different features:
The lower a home loan’s interest rate, the less you’ll have to pay in interest charges with each repayment.
Some home loan interest rates can be fixed for a limited time, but will revert to variable rates that may rise or fall.
You may need to pay upfront fees when you first apply for a home loan. There may also be ongoing fees, paid monthly or annually over the loan term. You may also need to pay fees to use or access some home loan features.
Sometimes a home loan with a low interest rate and high fees can actually cost more than a home loan with a high interest rate and low fees.
This figure combines the cost of interest charges and standard fees on your home loan. The comparison rate can give you a better idea of a home loan's total cost at a glance. This can make quickly comparing home loans simpler.
Not every fee or other loan cost is included when calculating a comparison rate. It’s important to carefully look at different home loans before making an application.
Some home loans offer features and benefits that can help you manage your costs. For example:
- Extra repayments Paying more than the minimum required amount onto your home loan can help shrink your loan principal and reduce your future interest charges.
- Redraw facility Allows you to take extra repayments back out of your home loan if you need this money back in your bank account.
- Offset account A savings or transaction account linked to your loan. Money in this account is included when calculating your interest charges. For example, if you have a $350,000 mortgage, and $25,000 saved in your offset account, you’ll pay interest as if you only owed $325,000. This can help further reduce the interest charges on your loan.
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Frequently asked questions
What is an interest-only loan? (include how do I work out interest-only loan repayments)
An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.
Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.
While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.
How can I calculate interest on my home loan?
You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.
If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.
What is principal and interest'?
‘Principal and interest’ loans are the most common type of home loans on the market. The principal part of the loan is the initial sum lent to the customer and the interest is the money paid on top of this, at the agreed interest rate, until the end of the loan.
By reducing the principal amount, the total of interest charged will also become smaller until eventually the debt is paid off in full.
What is the best interest rate for a mortgage?
The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.
While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.
Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.
To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.
Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.
Mortgage Calculator, Repayment Type
Will you pay off the amount you borrowed + interest or just the interest for a period?
How do I calculate monthly mortgage repayments?
Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.
Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.
What happens to my home loan when interest rates rise?
If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.
When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.
There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.
How can I pay off my home loan faster?
The quickest way to pay off your home loan is to make regular extra contributions in addition to your monthly repayments to pay down the principal as fast as possible. This in turn reduces the amount of interest paid overall and shortens the length of the loan.
Another option may be to increase the frequency of your payments to fortnightly or weekly, rather than monthly, which may then reduce the amount of interest you are charged, depending on how your lender calculates repayments.
What is a fixed home loan?
A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.
How do you determine which home loan rates/products I’m shown?
When you check your home loan rate, you’ll supply some basic information about your current loan, including:
- the amount owing on your mortgage
- the value of your property
- your current interest rate
- name of existing lender
- property address
We’ll compare this information to the home loan options in the RateCity database, and show you which home loan products you may be eligible to apply for.
Who has the best home loan?
Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.
To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you.
What are extra repayments?
Additional payments to your home loan above the minimum monthly instalments, which can help to reduce the loan’s term and remaining payable interest.
Remaining loan term
The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.
Can I enter more than once?
You can only enter the draw for the chance to win $1 million once. However, you can get additional entries by inviting your friends to check their own home loan rates.
When you complete your initial entry, you’ll receive a unique URL that you can send to your friends. For each friend that checks their home loan rates using this URL, you’ll receive one additional entry into the draw.
Does Real Time Ratings' work for people who already have a home loan?
Yes. If you already have a mortgage you can use Real Time RatingsTM to compare your loan against the rest of the market. And if your rate changes, you can come back and check whether your loan is still competitive. If it isn’t, you’ll get the ammunition you need to negotiate a rate cut with your lender, or the resources to help you switch to a better lender.
What is a specialist lender?
Specialist lenders, also known as non-conforming lenders, are lenders that offer mortgages to ‘non-vanilla’ borrowers who struggle to get finance at mainstream banks.
That includes people with bad credit, as well as borrowers who are self-employed, in casual employment or are new to Australia.
Specialist lenders take a much more flexible approach to assessing mortgage applications than mainstream banks.
The amount you currently owe your mortgage lender. If you are not sure, enter your best estimate.
What happens if I don’t know my monthly repayments?
Your repayments should appear on your bank statements or your internet banking. If you make weekly or fortnightly repayments, make sure you convert them to monthly calculations.
What's wrong with traditional ratings systems?
Most comparison sites give you information about rates, fees and features, but expect you’ll pay more with a low advertised rate and $400 ongoing fee or a slightly higher rate and no ongoing fee. The answer is different for each borrower and depends on a number of variables, in particular how big your loan is. Comparisons are either done based on just today or projected over a full 25 or 30 year loan. That’s not how people borrow these days. While you may take a 30 year loan, most borrowers will either upgrade their house or switch their home loan within the first five years.
You’re also expected to know exactly which features you want. This is fine for the experienced borrower, but most people know some flexibility is a good thing, but don’t know exactly which features offer more flexibility than others.
What is the flexibility score?
Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.
They’re not always timely
In today’s competitive home loan market, lenders are releasing new offers almost daily. These offers are often some of the most attractive deals in the market, but won’t get rated by traditional ratings systems for up to a year.
The assumptions are out of date
The comparison rate is based on a loan size of $150,000 and a loan term of 25 years. However, the typical loan size is much higher than that. Million dollar loans are becoming increasingly common, especially if you live in metropolitan parts of Australia, like Sydney and Melbourne. It’s also uncommon for borrowers to hold a loan for 25 years. The typical shelf life for a home loan is a few years.
The other problem is because it’s a percentage, the difference between 3.9 or 3.7 per cent on a $500,000 doesn’t sound like much, but equals around $683 a year. Real Time Ratings™ not only looks at the difference in the monthly repayments, but it will work out the actual cost difference once fees are taken into consideration.