The Pros and Cons of Interest-Only Mortgages

An interest-only mortgage requires lower monthly payments initially. This type of mortgage is best suited for those individuals with ample assets, good credit and short-term ownership.

As the name of the mortgage implies, borrowers will pay the interest that accrues on the debt each month. This means that borrowers make no payment towards the actual debt itself.

Despite their payments, the size of the loan will not be reduced. Borrowers will only be paying off the interest as it occurs. This means that the loan summary will not get any bigger.  

For example, if someone borrows $100,000 on a 30-year interest-only mortgage, with a 5-year interest-only term, at the end of the 5-year IO term, they will still owe $100,000 and have the remaining 25 years to repay the principal and interest. 

With this in mind, an interest-only mortgage tends to be far more common for property investors than owner-occupied borrowers, unless in times of hardship or to reduce your mortgage repayments as you prepare to sell your home. 

What are the pros of opting for an interest-only mortgage? 

The main benefit of an interest only term is lower mortgage repayments. For investors, having your investment lending on an interest only term can be more tax efficient, so you can focus repayments on ower occupied debt which isn’t tax deductible.

What are the cons of opting for an interest-only mortgage? 

Once the interest-only term ends (1-5) years, the mortgage reverts back to principle and interest repayments. If the interest-only period is, say 5 years over a 30-year mortgage, the borrower needs to evidence that they are able to service the loan over 25 years as when the 5 years interest-only is up, they need to repay the remaining principal and interest over 25 years.

Is an interest-only mortgage right for you?

At the end of the day, whether an interest-only mortgage is the right route for you will depend on your own personal circumstances. It is helpful to speak to a reliable mortgage advisor for some advice. 

Looking for a mortgage advisor in NZ? Whether you’re buying a home, investing in property or looking to protect your assets - we’re here to make it simpler. We make your journey to homeownership as seamless as possible. Talk to a mortgage advisor in NZ today here at Simpler. Let us help you with a free, no-obligation review. Get in touch with us. 

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