There’s a dazzling array of home loan options at your fingertips when you speak with a mortgage broker in Proserpine, Bowen, Collinsville and other areas of the Whitsunday Shire. One type of financing that’s come to prominence in Australia’s current market conditions is the interest-only loan.

What is an interest-only loan?

With most home loans, every time you make a repayment, you’re paying down both the principal (or the actual value of the loan you took out) and the interest charged on that principal. By contrast, interest-only loans, as you might’ve guessed from the name, are a type of mortgage product where you only pay off the interest on your loan, leaving the principal intact.

Why would I choose an interest-only loan?

Interest-only loans are almost exclusively products for property investment. This is because, under the Australian tax system, interest payments on an investment property can be claimed as a deduction against your regular income.

So while you make repayments, your property grows in value while you potentially make some significant tax savings, and you stand to make a tidy profit when you eventually sell. It’s a seemingly ideal set up for negative gearing. Not only that, but the fact that you’re not making any principal payments frees up money for other purposes, such as investing elsewhere.

What should I be careful of if taking out an interest-only loan?

First of all, and most obviously, you’re not paying down any of your principal. This means that, at the end of the day, you’re still saddled with a large mortgage debt that you haven’t made a dent in over a number of years, and little to no equity.

Remember, too, that there are risks involved in this property investment strategy. If your home goes down in value by the time you’re ready to sell, then you might be in for a significant loss. Talk to your financial adviser before you sign up to an interest-only loan to make sure it will work for you.