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ONE in four home buyers is opting for interest-only home loans despite low interest rates and falling house prices, mortgage experts say.

Managing director of mortgage lender myrate.com.au Kevin Sherman says about 25 per cent of owner-occupiers are choosing interest-only home loans, while about 75 per cent of investors take this route.

However, Sherman says owner-occupiers need to think carefully before entering into interest-only territory, which can effectively result in the borrower “renting the property from the bank”.

“You are not making any progress in returning the funds that have been borrowed,” he says. “When you pay interest only, you are not paying down any principal.

“If you borrow $500,000 and pay interest only for five or 10 years, you still owe $500,000.”But he says interest only does result in borrowers having leeway to borrow more.
“The same monthly payments for interest only versus principal and interest would give you a higher loan amount for interest only.

“If you really, really want something, go interest only and you will be able to borrow more, but obviously there are risks associated with it.”

For investors it’s a different story. Interest is the only part of an investment home loan that can be claimed as a tax deduction and is the reason many investors opt for this type of loan. It’s best to consult a financial expert before you make any decisions.

Comparison website Mozo found of all its home loans searches in the past three months, 85 per cent were for principal and interest loans, while 15 per cent were for interest-only loans.

Resi Mortgage Corporation chief executive Lisa Montgomery says owner-occupiers should think twice before they choose interest-only home loans or simply make interest-only repayments on their loan.

“We still see people taking out interest-only loans however they are more for investors, particularly if they still have an owner-occupier property that they are paying off as well,” she says.

“But if you can pay principal and interest, you should pay principal and interest.”

* INTEREST-ONLY OPTIONS *

You pay off interest on the loan for a fixed time.

This will reduce your repayments for a certain period, but not the principal.

It will take you longer to pay off the loan.

You will also pay more interest in the long run.

If house prices drop, you will end up owing more than your house is worth.

* Source: MoneySmart


Posted by Sophie Elsworth – News Limited on 23rd September, 2012