4 major reasons why property investors use interest-only mortgages
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Interest-only mortgages were originally designed to meet the needs of an investor. This type of loan allows a borrower to pay interest only, and pay back the capital at a later date. They provide borrowers with great flexibility in managing their cash flow because there are no repayments during the initial period of time, making them ideal for property investors.
When people invest in real estate, they generally choose to do so with an interest-only mortgage because it can be more advantageous than a repayment loan. In some cases, borrowers might find that their tax position is more advantageous investing with an interest-only loan than repaying the loan, and may choose to invest with an interest-only loan for these reasons.
Interest only loans can be tax-efficient for investors
Property investors are able to use interest-only loans in order to make the most of their income. They are considered tax-efficient because they can offset all or part of their borrowing costs against their rental income, which reduces the overall tax that they have to pay on their investment.
Once a property investor has deducted all of his or her expenses from his or her property income, any remaining income can be included in the calculation of his or her taxable earnings. You can use this Interest only mortgage calculator to make your calculations. This will either mean that he or she has to pay tax on it at a higher rate, or that he or she will not have to pay tax because his or her total earnings are below the threshold for paying income tax.
Investors who want to reduce their taxable income are able to deduct the full amount of interest on their loan from their rental income before they work out how much tax, if any, they have to pay. This also works in reverse if an investor needs to claim back tax on his or her investment property.
Interest-only loans provide flexibility to manage outgoings and cash flow
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A standard, principal, and interest loan has fixed monthly payments that usually include servicing both the interest (the money you pay to borrow) and some capital (how much you owe). For investors who want complete control over their cash flow, an interest-only loan can provide this.
Interest-only loans provide investors with a way to whittle down their loans faster and free up additional cash flow. This is done by paying the interest only on the investment loan for a set amount of time, usually five years, before deciding whether to pay out the remaining debt with an increase in repayments or let the debt continue until maturity.
You can save money by paying off a portion of the loan during low-income periods
The benefits of an interest-only loan become obvious during periods where there is no income or minimal income; for example, while you’re waiting for rent to be received (after the tenant has moved into your property), between tenants, while the property is being sold, or between tenants and during renovations.
Interest-only mortgages are often advertised as an effective way of minimizing monthly repayments. That’s true, but you can save even more money than the interest savings by paying off a portion of the loan during low-income periods. This is because most people go through boom and bust cycles with their incomes – one month they might work overtime or work a few extra hours, and the next month they might have nothing to do.
In many cases, people will also receive bonuses from time to time during good months. If these bonuses are large enough, you can use them to pay off a portion of your loan without adding too much strain on the family budget. In fact, overpaying even a little can reduce the total amount of interest paid over the life of your loan.
Interest-only mortgages can provide a steady source of income
Which is paid at the same time every month. If you are saving for an investment property, it’s possible to use interest-only repayments to make an increasing deposit on your next property without missing a single interest-only payment. For this reason, many investors prefer interest-only mortgages to low-interest, high-repayment loans.
Interest-only loans are part of a wealth creation plan because the borrower is only repaying the interest of the loan, not any capital (the initial cost). This allows borrowers to not be burdened with large repayments, but keep all of their disposable income for other purposes. These types of loans are typically used for larger purchases such as property.
With interest-only mortgages, there are no monthly repayments to worry about, and repayments can be made whenever funds are available. You can save money by paying off a portion of the loan during low-income periods. By opting for an interest-only mortgage you only pay the interest on the outstanding balance and not the actual amount borrowed and there is still some flexibility.
