Many property investors in Australia opt for interest-only loans, especially during the early years of their investment. The rationale is that it minimizes the monthly outgoings, thereby improving cash flow. This can be particularly advantageous if the property is negatively geared, as the interest component of the loan is tax-deductible.

If you are experiencing temporary cash flow issues, perhaps due to a career change, starting a business, or other short-term financial commitments, switching to interest-only payments can reduce your monthly financial burden until your situation improves.

Some financially savvy individuals may opt for interest-only loans as part of a broader investment strategy. The idea is to free up cash that would otherwise go towards the principal repayment, and instead invest it in higher-yielding opportunities. This strategy, however, requires discipline and a good understanding of both the property market and other investment avenues.

During the construction phase of a property, borrowers might opt for interest-only payments until the construction is completed and the property is either sold or begins generating rental income. While there are scenarios where interest-only payments can be beneficial, it’s crucial to be aware of the risks:

• Higher Total Interest Cost: Over the life of the loan, you’ll end up paying more in interest compared to a principal and interest loan, because the principal balance does not decrease during the interest-only period.
• Market Risk: If the property value decreases, you could find yourself in negative equity, especially if you haven’t been paying down the principal.
• Repayment Shock: Once the interest-only period ends, your repayments will increase significantly, as you’ll need to start paying off the principal over a shorter period. Before deciding on an interest-only mortgage, it’s advisable to speak with a financial advisor or mortgage broker who can help assess your individual situation and long-term goals. They can also help you understand the terms and conditions associated with interest-only loans, including any restrictions or fees for switching to a principal and interest loan later on.