Changing your home loan to interest only, is it a good idea?
Changing your home loan to interest-only may seem like an attractive option to ease financial hardship, but it's important to understand the implications and potential risks of doing so. In this blog, we'll explore whether changing your home loan to interest-only is a viable way to get out of financial hardship.
What is an interest-only home loan?
An interest-only home loan is a loan where you only pay the interest component of the loan for a specified period, usually up to two years. During this time, your monthly repayments will be lower than with a principal and interest loan, as you are only paying the interest on the loan. However, after the interest-only period, you'll need to start paying off the principal as well, which can result in significantly higher monthly repayments.
Can changing your home loan to interest-only help you get out of financial hardship?
Changing your home loan to interest-only may provide temporary relief from financial hardship, as it can lower your monthly repayments in the short term. However, it's important to consider the long-term implications of doing so. By only paying the interest component of the loan, you're not reducing the principal amount owed, which means you'll still owe the same amount at the end of the interest-only period.
Moreover, if you're already experiencing financial hardship, changing to an interest-only loan may make your situation worse over time. Once the interest-only period ends, your monthly repayments will increase, and you may find it difficult to meet these higher repayments if your financial situation hasn't improved. Furthermore, if interest rates increase during the interest-only period, your monthly repayments will also increase, potentially making it even more challenging to meet your repayments.
What are the potential risks of changing your home loan to interest-only?
There are several risks associated with changing your home loan to interest-only, including:
Higher overall cost: By only paying the interest component of the loan, you're not reducing the principal amount owed. This means you'll pay more in interest charges over the life of the loan, resulting in a higher overall cost.
Reduced equity: As you're not reducing the principal amount owed, you'll have less equity in your property than if you had a principal and interest loan. This can make it more challenging to refinance or sell your property in the future.
Limited options: Changing to an interest-only loan may limit your options in the future, as not all lenders offer interest-only loans, and you may find it more challenging to refinance in the future.
In conclusion, changing your home loan to interest-only may provide temporary relief from financial hardship, but it's important to consider the long-term implications and potential risks of doing so. It's essential to seek professional financial advice and explore all options available to you before making any decisions regarding your home loan. Remember, a financial hardship is a serious situation, and it's always better to seek help and advice from qualified professionals to get back on track.
