March 05, 2013
The six benefits of why all your loans must be interest-only loans: Interest-only loans are far superior to principal-and-interest home loans for six main reasons.
1. An interest-only loan works exactly the same as a principal-and-interest loan – if you pay the same monthly amount as recommended on the principal-and-interest loan.
2. With interest-only you own the redraw of your principal part of your repayment – with a principal-and-interest loan the bank take away (and never give you access to) the principal part of your repayments; this is lost forever on a principal-and-interest loan. This is crazy if you ask me. The bank owns your principal reductions. Why let the bank own something that you should own? Interest-only makes you the owner of the principal part of your repayments.
3. With interest only, your loan limit never drops, giving you more choices by giving you more redraw dollars.
4. An interest-only loan is the more strategic loan for tax reasons. If you have outstanding home loan debt (which I call bad debt because it is not tax deductible), you want to put every extra cent you can towards your home loan because you want to reduce non-tax-deductible debt as soon as you can, hence the principal-and-interest repayment strategy.
5. Paying interest-only also gives increased borrowing power when going to buy your next property. If your repayments, for example, are at 6 per cent on a $500,000 interest-only loan, they are $2500 per month instead of $3000 per month for principal-and-interest. The difference is $500 per month. When you go back to the bank to borrow more money for your next property, the banks look at your commitments per month when working out how much you can borrow. If you have interest-only payments, as a minimum you are required to pay $2500, even though you may be paying $3000 (which is the principal-and-interest amount).
6. You receive ‘reward for effort’, with an interest-only loan. While on interest-only, your repayment drops every month, fortnight or week, as you pay your loan down. Your ongoing payment drops while on principal-and-interest the repayment stay the same for 30 years.
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