Why are interest-only loans so popular with investors?
In 2014, the Australian Securities and Investments Authority recorded that there was $142.8 billion worth of interest-only loans, up from about $89 billion just two years before. Now, in 2016, the Reserve Bank of Australia has revealed that the prevalence of interest-only loans has gone nowhere but up.
Clearly, they are a popular choice, but why are they often so useful for Queensland investment property?
Did you know you can claim a tax deduction on the interest you are paying on an investment loan? This is one of the reason why an interest-only loan is so popular, as you can claim all of your repayments as you are only paying interest – unlike a standard loan.
Combine this with an offset account and you'll find that you're paying out less for your rental property than before. That means less financial stress for you as well as the opportunity to put the surplus elsewhere. Speaking of which…
Rapid portfolio growth
You can rapidly expand the number of properties in your portfolio and still manage the monthly costs.
It's always important to ensure that your portfolio is diversified to minimise risk, and that's hard to do if you only have the one investment property. Because interest-only loans give you a short period of smaller repayments, you might find that you can rapidly expand the number of properties in your portfolio and still manage the monthly costs.
One thing to remember, however, is that you won't be gaining equity in your property from the bottom end, as you won't be paying off the principal. However, with the rapid capital gains that Brisbane property has seen (7.46 per cent year on year, according to CoreLogic RP Data), you'll find that it often balances out in the end.
Keep the risks in mind
However, as with all investments, you have to understand that there are pros and cons to every service. Interest-only loans give you tax benefits and the chance to reduce your initial payments, it's true, but after the interest-only period is over, you might find yourself paying more than you are comfortable with!
This is why it's so important to ensure you speak with a property investment expert. Interest-only loans are a great way to build your property portfolio, but only if you do it in the right way. Here at Think Money, we're experts in keeping your debt managed and under control. If you're thinking of using an interest-only loan, make sure you get in touch with us today!