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Why Interest-Only Loans?

Craig Sharp:             If I’m paying interest only, I’m not paying any of the asset, am I?

Terry Christo:             Correct, for a period. Eventually, you have to pay off the asset. You can’t go interest only forever because no one will lend you the money, but you may go interest only for a period, two, three, five years, again similar to fixed.

Craig Sharp:             So what’s the purpose of me having an investment property if I’m just paying the bank’s interest every year?

Terry Christo:             In a lot of cases where people do an investment property, they may also have a home mortgage. So if they’re trying to pay off their home quickly, they’d rather put the money into that property and pay that debt off, and keep the interest as high as possible on their investment property, because they can claim that. They can’t claim the interest on their own occupied home.

Craig Sharp:             Aha.

Terry Christo:             So that’s why a lot of people do that. Furthermore, if property prices increase, that’s what they’re really going for is some capital growth, and the value of that property over a period of time. Maybe the debt’s not coming down, but the property values are going up, so they’re forging a bit of equity in the property.

Craig Sharp:             So there they’re picking up the game in the difference between the interest rate they’re paying, and the market growth. They get the difference.

Terry Christo:             Exactly, exactly, and especially as I said if they have an owner-occupied mortgage, which they can’t claim any of that interest against anything, they basically want to accelerate and pay that off as quickly as possible, and rather put the money there rather than reducing the debt on an investment property.

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