An interest-free loan enables you to pay only the interest owing each month.  For example, if you have a $200,000 mortgage and the interest rate is 8%, you are only required to pay the interest of $1333 every month.  If you were to pay the interest and some of the loan back, over 25 years, then the monthly repayments would be around $1467.  

For people on a tight budget or investors looking to maximize cashflow, an interest-only refinance can be an attractive option..  

An interest-only refinance will normally allow the interest only payments for a stipulated number of years; after this introductory period has expired you will be required to pay the principal and interest owing each month. You have a choice of standard fixed-rate or adjustable-rate mortgages. Your Local Finance Brokers can help you to find interest-rate financing with interest-rate only monthly repayments for the initial ten years.

How Interest-only Loans Work

You can just pay the interest incurred for that month, thereby making your repayment lower. The interest rate may or may not be lower than for a standard home loan, but you have the flexibility of choosing whether to pay any of the principal for that month. You will need to examine your financial circumstances to decide about how much you will pay, thereby keeping control of your cash flow. So when you need more cash you may opt to pay interest only, and when you have some extra cash you may choose to pay some of the principal off, resulting in the loan being paid off faster and less interest being accumulated.

Who is an Interest-only Refinance Loan for?

An interest-only refinance loan will generally only benefit borrowers who plan to invest the cash to receive a higher rate of return. Standard loans do not have this facility. But you could use the money for other purposes such as paying off your credit card, which invariably has a much higher interest rate than your mortgage, or for other important things such as education, renovations or travel.

An interest-free loan could free up thousands of dollars for different investments or expenditures. It may also be useful for people who think they are likely to move from their home before the loan’s interest-free period has expired.

The Truth About Interest-only Refinancing

Some borrowers may think that if you only pay the interest each month that you are not building equity in your home. However in Australia, properties have been appreciating in value in the range of 5-10%. So you may decide that paying the interest is currently advantageous for your financial situation. But you should continue to monitor your circumstances and seek advice where necessary.