Interest Only loan repayments have always held a stigma of not being the right way to structure loans because your loan balance does not reduce over time. However many astute property owners use interest only loan repayment structures to build wealth, here’s how and why.
Interest only loan repayments (as compared to principal and interest loan repayments) have one distinct benefit, they allow you to maximise your cash flow to enable you to do other things with your money.
Some people choose to use this surplus wisely to help fund other wealth generating activities, in particular buying additional assets that appreciate in value.
Others, either through necessity or choice spend the surplus cash flow on essential or discretionary activities.
Interest only debt is best used in circumstances where the interest is tax deductible, for example in a negatively geared investment property situation where one needs to minimise the cash shortfall between rental income and loan interest costs.
Furthermore, interest only debt is only recommended when you purchase assets that are expected to appreciate in value. Real estate is the favoured asset class for most people however there are many other options including shares.
The general rule when you have both a Home Loan and an Investment Loan is to have your Home Loan set to principle and Interest repayments and your investment Loan to be on interest only repayments.
The reason many people are advised by their accountants to do this is to maximise their tax deductible investment debt and pay down their non-tax deductible home loan debt as quickly as possible.
By Cameron Tilley, Finance Broker, Westminster National