What will an interest-only mortgage really cost you?

 

For most Australians, a mortgage is one of the most significant financial decisions they will make in their lives.

While an interest-only mortgage may be a smart strategy for investing and tax purposes, many owner-occupiers are attracted to them due to their initial lower repayments, which generally will cost them more in the long run.  Some lenders have also started charging higher interest rates on interest-only mortgages compared to principal and interest mortgages.

Anyone thinking of taking out an interest-only mortgage needs to have a clear plan of action when the interest-only period ends to ensure they can afford the repayments, which may increase significantly,

Consumers who are considering an interest-only mortgage, or who already have one at present, should consider the following:

  • ensure you can afford the increased repayments once the interest-only period ends, and also factor in an interest rate rise
  • the principal of the loan will not reduce while you are making interest-only repayments
  • using an offset account to reduce the cost of an interest-only mortgage will only work if you can keep making these extra repayments without making any withdrawals.  If you are tempted to dip into your offset account, then you might be better off with a principal and interest mortgage instead.

I have a responsibility to ensure the interest-only loans I arrange meet my customers’ requirements and objectives, and do so in a way that is consistent with my customers’ plans.

The following infographic explains how interest-only mortgages have grown in Australia, how much people are borrowing for an interest-only loan and how much you will really pay for this type of loan.

 

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ASIC’s MoneySmart Interest-only mortgage calculator

 

Jason Thomson | Mortgage Adviser and Finance Broker | Smartline Cairns

 

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