Thinking of adding the next big winner to your investment portfolio? If so, you’re probably already considering how you’ll finance the purchase.
Many investors opt for interest-only mortgages, where rather than making payments for outstanding capital, you pay only the interest over the loan term. But is this kind of loan right for you?
The benefits of interest-only financing
When the term of an interest-only loan is finished, you’re left to pay the same amount of capital you borrowed initially. This is the reason homeowners tend to steer clear of this kind of loan: the difficulty of repaying borrowed capital in one lump sum.
Investors, however, rely on capital growth to repay the mortgage. They’re confident that by the time the loan must be repaid, selling will give them enough to pay back the loan and take in a decent profit.
Other advantages of an interest-only loan include:
- Tax benefits,
- Increased cash flow,
- Greater flexibility,
- Less potential to go into arrears,
- Debt depreciation over time.
What are the risks involved?
That said, interest-only loans aren’t for everyone. It’s important to be aware of the drawbacks as well, including slower equity growth and the fact that it might prove very difficult to change your mortgage should the need arise.
Further, most investors will need to sell the property at the end of the term, or else leverage the home against another.
If you do decide you want to take out an interest-only loan, be sure to work closely with your Civium property manager. While there’s no guarantee that property prices will always rise enough to pay off any debts, an experienced market expert can help you find the ideal property in the most suitable area for your strategy.