When it comes to property investing, the way you structure your loans can make a big difference to both your cashflow and long-term strategy. One option that many investors consider is an interest-only loan. This type of loan means that, for a set period (usually up to five years), you only pay the interest on the amount you have borrowed without reducing the principal.
At Simplify Finance, we often discuss this strategy with clients who are looking to grow their portfolios. Below, we outline the key pros and cons to help you decide if it may suit your situation.
The Benefits of Interest-Only Loans
- Maximise Tax Deductions
Because you are only paying interest, your loan repayments are fully tax-deductible (subject to ATO rules and your personal tax situation). This can create additional benefits at tax time, particularly for high-income earners.
- Lower Cashflow Requirements
Repayments on an interest-only loan are lower than principal & interest repayments. This frees up cashflow, which can be redirected towards holding multiple properties, covering unexpected costs, or saving for your next purchase. For investors focused on expansion, this flexibility can be a powerful tool.
- Greater Flexibility
If you choose a variable loan, you still have the option of making extra repayments towards the principal whenever it suits you. This gives you control – you can prioritise cashflow now, and then reduce debt later when your financial position improves.
The Drawbacks of Interest-Only Loans
- Higher Interest Rates
Lenders generally charge a premium for interest-only terms compared to principal & interest loans. Over time, this can add up to a noticeable difference in cost.
- No Automatic Debt Reduction
While you may enjoy higher tax deductions, your loan balance itself does not reduce during the interest-only period unless you choose to make voluntary repayments. This can delay your journey towards full ownership and reduce equity growth through loan reduction.
Is Interest-Only Right for You?
Interest-only loans can be an effective strategy for investors who want to:
- Maximise cashflow while building their portfolio
- Hold multiple properties at once
- Benefit from greater flexibility in their repayment strategy
However, it is important to weigh these benefits against the trade-offs of higher rates and not reducing debt automatically. Many investors use interest-only loans during the high-growth phase of their portfolio, and then switch to principal & interest once their cashflow allows.
Final Thoughts
At Simplify Finance, our role is to help you structure your loans in a way that supports your investment goals. If you are considering interest-only repayments, we can assess your borrowing position, model the long-term impacts, and help you find a lender that aligns with your strategy.
Disclaimer: This information is general in nature and does not constitute financial advice. You should seek independent tax advice from your accountant regarding deductibility and confirm loan structures with your mortgage broker before proceeding.