Pay relatively less in the short term for your loan? That would be an interest only loan we’re talking about.

An interest only loan is where you only pay the interest component of your loan, meaning the principal doesn’t reduce. These type of loans are popular choices for investors who want to minimise their repayment burden and maximise tax deductions.

Most lending institutions apply a time limit to the period you only pay interest. For many this is 5 years before it will revert to payments of principal and interest, but some offer longer terms, and there is sometimes the opportunity to extend the interest payment only period.

By only being liable to pay the interest part of the loan for the agreed upon period, the repayments can be easier to manage. And because the interest is usually tax deductible on a loan used to purchase an investment asset, an interest only loan offers sizeable tax advantages.

If you do pay more than the interest component, this can chip away at the principal – but you can borrow back up to the full loan amount if you need to (in most cases).

Because an interest only loan means repayments on their investment asset are lower, some people find they are able to channel more money into repaying their home mortgage (for which interest rates are not tax deductible). This helps them build more equity in their home, which can then be used as collateral for future investment borrowings.

Successfully managing an interest only loan does require discipline – as at some point you will be called upon to repay the principal and you need to make sure you are in a strong position to do so.

If you’d like to discuss the pros and cons of an interest only loan in relation to your personal situation, contact us. Your Ink Wealth Advisor would be pleased to discuss this with you.