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Is interest only in my interest?

I’m finding the recent interest rate rises a bit harrowing and have heard that you can access a product called an interest-only home loan. What do you think of not paying off your principal?

Generally, for your own home I like the idea of knocking off your home loan – principal and interest – as quick as you can. The experts recommend your minimum repayment should be $8 per $1000 per month and that’s $2000 a month per $250,000 borrowed. This is based on a 22-year loan at eight per cent.

Even by paying your loan fortnightly instead of monthly you can save $61,000 off your interest bill and four years of repayments. This happens because there are 26 fortnights a year and that means you pay more per year, but the savings you make are real.

Interest only loans are recommended for investors and it works well where capital gain is quite good. However, I have seen homeowners use interest only loans when things were tight for say two or three years and have then they have switched to a conventional loan when interest rates fall and their income has improved.

The monthly repayments will be less with an interest only loan, but you have to be disciplined enough to take the savings and use them responsibly. They shouldn’t be used to keep on spending.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

Published on: Wednesday, January 20, 2010

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