Introducing Interest Only Home Loan. How Does it Work?
Meta Description: Is it the first time you have dealt with home loans? Please find out how it exactly works.
Recently, an interest-only home loan facility was launched by Standard Chartered Bank. Both existing and new home loan customers have been granted this outstanding facility. Whenever customers purchase any completed residential property, they will become eligible to apply for an interest-only home loan.
Borrowers only need to pay the interest amount accrued on the principal outstanding during the loan tenure. This limited period is usually referred to as the “interest-only period.” Moreover, there will be no deduction of the principal amount.
This article will provide an insightful overview of the functionalities of interest-only home loans. Please keep reading till the end to have a clear understanding of it.
What is an Interest-Only Home Loan?
The majority of the home loans available in the market are principal and interest loans. After applying for these loans, borrowers need to make regular payments to repay the borrowed amount and interest value. But an interest-only home loan borrower needs to pay the interest value only for a specific amount of time.
But what’s the catch? How can money lenders provide such freedom to their borrowers? Let’s find out.
Borrowers need to pay the interest value on the principal amount only during the interest period. For this reason, the repayment values are comparatively lower than the standard principal and interest loans.
The interest-only period usually ranges from one to three years. So after the termination of this period, borrowers need to repay the principal and interest amount over the remaining loan term.
What are the Pros of Interest-Only Home Loans?
Here are some compelling benefits of interest-only home loans:
- Initially, the repayment value is comparatively lower. So you will have sufficient money in your custody to improve or renovate your new property.
- Various financial institutions offer the benefit of a home loan balance transfer. This facility allows you to swiftly move your granted home loans from one financial institution to another.
- Significantly reduces the cost of purchasing a residential investment property in the short run. This deliberately helps borrowers to make more remarkable contributions to the principal place of residence.
What are the Cons of Interest-Only Home Loans?
Some of the significant cons of interest-only home loans are:
- The sudden increase in repayment value after the termination of the interest-only period might be intimidating since the unexpected pressure of principal and interest repayments might loom large.
- Lenders will deliberately assess your capabilities for repaying the principal and interest values. In some cases, this situation might reduce the borrowing power and confidence of the borrowers. The repayment value will be much higher than a principal and interest loan for the entire term.
How Does an Interest-Only Home Loan Function?
After an interest-only home loan is granted, the repayment value only covers the interest on the borrowed amount. However, this is applicable for a set period, ranging from one to three years. Since borrowers don’t repay anything from the principal amount, it naturally doesn’t reduce.
Nevertheless, the interest-only period comes to an end after a significant time. And that is when the interest-only loan will deliberately change itself to a principal and interest loan. So, borrowers need to start repaying the principal amount and the stipulated interest rate. This means borrowers need to make higher repayments.
How to Manage the Excruciating Switch from Interest-Only Loan to Principal and Interest Loan?
The sudden change in the character of the loan might give a tremendous shock to borrowers. Since the repayment value shoots considerably higher, people might not know what to do. However, following specific strategies will significantly help in managing the sudden shift. They are:
- Acquiring a better deal on the loan amount
- Slowly increasing the repayment value of loans
- Discussing better options with the lender
- Obtaining help if required
Even though interest-only home loans are a great option, they can be challenging for many borrowers. We suggest you not go with the flow and obtain it. If your financial needs demand, you should consider opting for this loan option.