Interest Only Repayments on your Owner Occupier Home Loan
30 November 2015 M'OR Mortgage Options
Interest Only (I/O) repayments sometimes get a bad reputation on owner occupier loans because they don’t help you to actually pay down your loan.
Whilst there’s been some media hype lately about I/O loans carrying greater risk, the RBA’s ‘Financial Stability Review for October’ reported that, “ASIC found that interest-only loans made in recent years have been less risky… they have tended to have lower LVRs at origination, and on average have been paid down more quickly than a typical principal and interest loan when balances in offset accounts are taken into account.”
It all comes back to taking personal responsibility for your finances – which we should all be doing on a daily basis!
Providing you have the right loan structure in place and are confident in your ability to manage money, I/O repayments can provide great flexibility and be a good option for your Owner Occupier loan.
Here’s some of the reasons that might prompt you to choose Interest Only (I/O) repayments on your home loan.
1. You anticipate a period of reduced cash flow
I/O repayments are lower than P/I repayments. So, if you’re expecting cash flow to be tight for a period of time (i.e. you’re starting a family or reducing work hours to complete study), I/O repayments can be good option to help ease the financial pressure over this period.
2. There’s a chance your current home will become an investment property
Having I/O repayments now can provide benefits later on, should your current home become an investment property in the future.
It’s all about getting the balance right between your ‘good debt’ and ‘bad debt.’ Good debt is generally considered deductible because it’s been raised to pay for something that generates income, like an investment property. Bad (or personal) debt is generally considered not deductible because it’s been raised to pay for something that DOES NOT generate income, like your owner occupier home.*
The idea is to maximise the ‘good debt’ and minimise your ‘bad debt.’
By making Interest Only repayments on your home loan now, you won’t reduce debt that is potentially deductible in the future. And at the same time, you can build up your cash, save interest costs using an offset account and still have the flexibility to pay down your loan if you want to.
You just need to save enough in your offset account to make up for the fact that you’re not technically paying your loan down.
If you want further explanation, please contact us for a Factsheet. We can discuss with you in detail how this loan structure might benefit you.
*The deductibility of debt is generally determined by what the funds are USED FOR, not by the nature of the security that the debt is secured by. Please note this does not in any way constitute taxation advice and for specific information specific to your personal situation, please refer to the www.ato.gov.au and seek personal taxation advice from your accountant.
**This information is provided as a guide only. MO’R MORTGAGE OPTIONS does not warrant or represent that the information is free from errors or omissions or is suitable for your intended use. The information has been prepared without taking into account individual objectives, financial situation or requirements. Before acting on any information presented, please contact us for more information. Locavmic Investments Pty Ltd is a Corporate Credit Representative (Credit Representative Number 396773) of BLSSA Pty Ltd (Australian Credit Licence Number 391237).