Interest only loans

Interest only mortgage home loan finance

Interest only loans are mortgage home loans where the principal loan amount is never repaid. Instead the mortgage payment rates only covers the interest of the loan.

This type of arrangement is popular with property investors where the investor wishes to maximise the tax minimisation effects of property investment, minimise the payments, especially where the interest only loan is buying negatively geared property, that is, where the payments and expenses of the property exceed the income in rent from the property. The other benefit of interest only loans is the ease at calculating any tax deductions, as the interest is a cost, and as no principal is being paid the whole mortgage payment is a deduction.

Interest only mortgage loans are also popular in areas where high property costs are the norm, in Sydney Australia, and London UK for instance, where property costs are so high that they take a substantial amount of the household income to service the loan.

A line of credit

A line of credit is any interest only credit facility that allows the borrower to draw to a certain credit limit and replace the drawings as cashflow permits. Examples are credit cards, a business overdraft and a revolving line of credit home mortgage. The borrower is only charged interest on the credit drawn.

What is a line of credit in terms of a mortgage?

In the context of a home mortgage, a line of credit is a personal finance facility, secured by a mortgage on residential property. The security offered can be changed, as the owner moves to a new home for instance, because the line of credit is made available to the owner and the security for the line of credit is secondary to the line of credit arrangement.

Revolving line of credit home mortgage

A revolving line of credit is an interest only equity home loan facility that has a credit limit, usually about 80% of the home value. The line of credit never has to be paid back [technically] unless the home owner can no longer meet the lender's requirements. Usually the lender requires a borrower to renew the arrangement every 5 years but some lenders let a line of credit go in without requiring this, as long as the loan is kept with the line of credit limit.

The line of credit allows the home to:

Tap the equity of the home for lifestyle or investment purposes. The line of credit can be drawn up to the line of credit.

Make extra repayments to reduce the loan interest. The line of credit borrower is only charged interest on the daily outstanding balance. Any extra repayments reduce the interest charged on a line of credit.

Make repayments in accordance with his or her cashflow, as no repayments are required as long as the line of credit is within the credit limit set.

The line of credit is very useful for small business people who have cashflow ups and downs.