Interested in an Interest Only Investment Property Loan?

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Are you looking for financing that would not significantly stanch your cash flow? An interest only investment property loan may be just the kind of mortgage you need. A good number of real estate investors take advantage of this loan to free up some of their funding to invest in another property or other investment vehicles while they wait for the property under the loan to appreciate in value.

How Does an Interest Only Investment Property Loan Work?

With this type of loan, all you are required to pay for within a set period is the payment for interest. The repayment of the loan principal will only be due at the end of the given period or at the time you would be reselling the property. With the “postponed” principal repayment, you can use the funds that is supposed to repay the loan principal to purchase another property or to invest in another investment vehicle.

You take out an interest only investment property loan if you can tell in advance that the property would be increasing in value over time, ideally before the loan principal would be due for repayment. This is to ensure that you can enjoy capital gains after repaying the principal once you resell the property.

How Long Can an Interest Only Investment Property Loan Run?

Typically, you can keep on paying interest only for 5 years, but a number of lenders may offer it for 10 years or longer. Keep in mind that the longer the period, the more beneficial for the investor/borrower. Why?

1. Because the more number of years that you are granted for this kind of loan, the longer you can avail of tax deductions for the payment of interest.
2. Because the longer the loan period, the odds that the property would gain more value would be greater. This is the case if the market is enjoying a rise in property values. However, be careful in treading this territory when the real estate values are dropping, such as what is happening currently.

What Happens When the Loan Period is Up and You Haven’t Resold the Property Yet?

When the loan lapses and you are still unable to repay the principal, the loan will change into a variable or fixed interest and principal investment property loan.

Benefits of Interest Only Investment Property Loan

1. Boosts cash flow

As already mentioned, this type of loan enhances cash flow since only the interest is due for the next 60 to 120 months while the principal is to be repaid later. This translates to lower monthly payments.

2. Tax Deductions

By making interest only payments, you can possibly request for tax cuts. In contrast, principal repayments do not merit tax deductions.

3. Computation of Returns Made Easier

Since your payments for the interest and for the principal are set apart, you can more easily and clearly reckon up the actual return the property is generating.

4. Self-liquidating Technique and Negative Gearing Tax Benefits

The beauty of taking out an interest only investment property loan is that you can make use of the rental income to repay the interest, and once you resell, you use the proceeds to pay for the principal while pocketing the capital gains. In the event that your investment is negative gearing, that is, if the interest payments and other costs of owning the property is more than the income that it is generating, you still have an advantage. Negative gearing entitles you to tax deduction against the income of the investment property.

5. Payment of Principal Postponed

With the repayment of the principal due only at the end of the loan, it gives you time to wait for the property to increase in value. And when this time comes (hopefully within the loan period), you can resell the property, use part of the proceeds to repay the principal and take the remainder as your profit. This can also be your buffer to inflation. While most people would dislike inflation because it means rising prices of commodities, but for you, it could also mean a rise in the market price of your property.

How Much Funding Can You Ask From an Interest Only Investment Property Loan?

You can get financing as much as 95 percent of the worth of the property you are buying. If you are lucky, you can find a number of lenders who will lend you 100 percent of the property value. If you want even more, well, you can! That is, if you own another property which you can use as cross collateral.