Low Interest, Interest only construction loans - Are type of loans helpfull?

In New Zealand, banks offer a specialist type of mortgage for those building a new property - the interest-only construction mortgage (For example Back my build from ANZ). This type of mortgage allows borrowers to pay only the interest on their loan for a maximum of two years while the property is being built and the progress payments are made. But are these loan a good alternative?

Firstly, it's important to understand what an interest-only mortgage is. As the name suggests, this type of mortgage requires the borrower to only pay the interest on the loan for a specified period of time, usually a few years. This means that the borrower's repayments are lower during this time, as they are not paying off the principal of the loan. After the interest-only period is over, the borrower will then begin to repay the principal, which can result in higher monthly repayments.

So, why would someone choose to take out an interest-only mortgage for their new build? The answer is simple - cash flow. When building a new property, there are often significant costs involved at different stages of the build process. For example, a deposit is usually required upfront, followed by progress payments as the build progresses. These payments can add up quickly and put a strain on the borrower's cash flow. By taking out an interest-only mortgage, the borrower can reduce their monthly repayments during this period, freeing up cash for other expenses related to the build.

Another benefit of an interest-only mortgage is that it can be easier to qualify for than a standard mortgage. This is because the borrower's monthly repayments are lower during the interest-only period, making it easier to meet the bank's affordability criteria. However, it's worth noting that the borrower will still need to demonstrate that they can afford the repayments once the interest-only period is over, so it's important to plan ahead.

So, is an interest-only mortgage a good idea for those building a new property? The answer is that it depends on your personal circumstances. If cash flow is a concern during the build process, then an interest-only mortgage may be a good option to consider. However, it's important to weigh up the benefits of lower repayments during the build period against the potential for higher repayments once the interest-only period is over.

It's also important to consider the interest rate that will be charged during the interest-only period. While the interest rate may be lower than a standard mortgage rate, it's important to ensure that the rate is competitive and that you're not paying more in interest over the life of the loan.

In summary, an interest-only mortgage can be a useful tool for those building a new property in New Zealand. It can help to free up cash flow during the build process and make it easier to qualify for a mortgage. However, it's important to carefully consider the potential for higher repayments once the interest-only period is over and ensure that the interest rate is competitive. As with any financial decision, it's important to do your research and contact me for professional advice if necessary.

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