Recently many first home buyers have inquired about buying their first home through an interest-only loan due to cash flow issues. It is definitely possible but it does come with some risks.
Interest-only loans are a type of home loan whereby the borrower only pays interest in the periodic repayments. The first home buyer can choose a period between 1 to 5 years. If a 30-year loan term is chosen along with a 5-year interest-only period, then the loan becomes payable over 25 years once the interest-only period expires.
Lenders will question why a first home buyer wants to choose on interest-only option, as most would like te first home buyers to reduce their owner-occupier debt unless a first home buyer is buying an investment property, whereby many borrowers choose this option for tax purposes. Below, we take a look at why first home buyers may opt to go for an interest-only loan.
CONSTRUCTION LOANS
This the most common reason for a first home buyer to apply for an interest-only loan. The convenience can be seen in the fact that most lenders will automatically grant an interest-only loan where the purpose is for a construction loan. Most commonly, lenders will grant an interest-only loan during the construction period only however some will allow you to do interest-only for a period of 1 or 2 years.
If your current rent payments are quite high and you believe you will find it difficult to maintain both rent and land construction loan repayments, then an FHBA coach will be able to seek an interest-only land loan in addition to the construction loan.
CHANGE IN INCOME SITUATION
An interest-only option as an owner-occupier buyer can be applied for where one or both applicants are on extended leave, which may include extended unpaid leave or maternity/paternity leave.
Some lenders will allow interest-only loans for a period of 1 or 2 years whereby the income may be lower for the initial period of the home loan. This is a particularly good option for mothers who may be taking unpaid leave for 12 or more months as lenders will use your return to work income for determining your borrowing capacity.
FUTURE INTENTIONS
Particularly in cases where both first home buyers are on strong incomes, some may be looking at living in their first home for a short period of 1-2 years and the looking at buying another home and converting the current property to an investment property. An interest-only loan on the first home would allow a first home buyer to reduce the amount of money they have to repay and allow them to maximise the savings for there next home deposit. In addition, they can also maximise the tax benefits by having more interest tax-deductible.
The above are the 3 mains reasons a first home buyer will choose to go with an interest-only loan. It is important to understand that lenders may charge a higher interest rate for interest-only loans in comparison to principal and interest loans. Please speak to an FHBA coach who can advise you on your interest-only options and the best interest rates available. we have rates starting from 2.89% for interest-only repayments.
To determine the best loan type for you, please click here.
Written by,
First Home Buyers Australia
