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What should an investor consider before taking an interest-only loan?

Interest only loan may give investor great financial flexibility and when they are borrowing to buy a property and just repaying the interest for a period. However, there are some significant risks consider before taking the interest only loan.

Interest rates are at the historical lows, so interest-only loans may sound more appealing than ever because they offer the opportunity to enter the property market with lower repayments. In saying that, care must be taken because interest only loan repayment does not pay down the actual principle of the property. As a result of that, the interest-only loan may cost the consumer more over the full term of the loan.

If you’re only repaying the interest on a loan, you’re not building up the equity of your home during that period. For an interest-only loan to be part of an effective property investment plan, the borrower must be comfortable that the property value will increase substantially. If the property value doesn’t increase by more than the interest paid, they may end up losing out the equity beginning.

It is crucial for the borrower to have a clear plan for what they are going to do when the interest rate rises or when the interest only loan period has expired and reverted to principle and interest repayments and how they are going to meet those additional repayments. For borrowers who are unprepared may find themselves in financial hardship.

It would be essential for somebody considering this type of loan to make sure they are understood the risk involved and have an apparent plan written down for what will happen when the interest-only period expires.

Please come to speak to Kevin Poh on 0415820016. He is mortgage experts who help borrowers match loans to their current circumstances and future goals.

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