What is an interest-only mortgage?
Generally, interest-only mortgages are designed to allow a property investor to secure new property by using their current home as security on the 2nd mortgage. To do this, you require some decent equity in your home which means you’ve been paying off your first mortgage for a few years now. The borrowing rules change from time to time and different rules are in place for Auckland. Property investors will use interest-only mortgages at a lower rate quite favourably because typically house prices increase 7% annually. If you borrow at 5% you’ll have a 2% buffer as a safe zone to protect the investment.
An interest only loan is where you pay only the interest owing each fortnight or month, but nothing off the principal. These are usually set up as short-term loans to help your keep payments low while you are building or renovating or investing. Bridging finance is sometimes used while you try to sell another home. With these loans, you have to repay all the outstanding loan at the end – or get another loan. An interest only loan will cost you more in interest than a normal ‘table’ loan because the principal isn’t going down. You’re only paying the interest and not for actual equity in the home.
Because you’re not repaying principal, you can free up cash for other purposes, such as renovations. But remember you pay interest on the full amount you borrowed until an agreed time because you are not paying off any principal in the mortgage(s) you have — then you still have to repay the loan amount (or you might for example request to switch to a different structure of loan).
You can refinance or refix your current mortgage(s) and borrow more money to help free up cash for a deposit on a new investment/home with an interest only mortgage and this is fairly common.
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