An interest in risk

It’s not for everyone. The faint-hearted, especially. But, with the market on the up, have you considered creating the beginnings of a portfolio by changing your home loan to interest-only?

Here’s the scenario: Your goal is financial independence. Your chosen primary vehicle is property. You’re paying off your home loan and can’t see how to free up enough cash to save a deposit or to service a loan for an investment property. The answer: you convert your home loan to interest-only to free up your cash.

As an owner-occupier, did you realise you may qualify for an interest-only loan on your principal place of residence? Not everyone does …

Obviously, the reality of enacting this strategy is much more complex and carries risk. Each investor has their own unique set of variables, such as likelihood of ongoing employment, family commitments and so on, but if building a property portfolio is one of your goals, this strategy may just be worth considering.

Typically, an interest-only loan works in your favour when the market is on the up. By its nature, an interest-only loan is one where you pay the interest portion of the loan as repayments (not the principal), so when the market increases, so too does the equity in your property.

The converse also holds true: if the market puckers up, an interest-only loan can place you in a risky financial situation, where equity in the property can disappear. But most home owners, regardless of loan structure, face that risk in a falling market.

The main point to consider is that interest-only loans are typically for a two to five year period, at which point you have to refinance the loan. Often this is hassle free if you meet lending criteria and your property has increased in value. But herein lies the risk: In the event you don’t meet lending criteria, you’ve lost equity in the property, or the lender insists on a principal and interest loan only, where to from here?

Your options range from looking at alternate lenders, finding a way to meet the principal and interest payments, renting the property out (there are tax implications for a previously owner occupied property, so see your accountant before this point), or probably your last option would be to sell the property.

Obviously, converting the loan for your principal place of residence into an interest-only loan isn’t for everyone. But, if you truly believe getting into the market has benefits that outweigh the risks, then perhaps this option is worth a little exploration.

Do your research. Do your research. Do your research. And as with any major financial decision, always seek independent financial advice.