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What does “Interest Only” mean when it comes to loan repayments?

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The term “Interest Only” refers to only making payments to the lender which meets the interest portion of the loan without paying any principle (loan amount borrowed) back to the lender. This can be common for investment properties on their accountant’s advice in certain situations, where the client is able to make a taxable deduction against the interest paid against the property to reduce their tax. If a client borrowed $200,000 @ 7.5% over 5 years on an interest only loan the repayments would be $1250pm. The same loan over a 20 year period with Principle and Interest repayments would incur $1612pm repayments. Investors may then wish to utilize the additional $362pm difference towards another investment. However it should be noted that you will still owe the $200,000 after 5 years having paid nothing off the principle if you opt for the interest only loan product. Maximum terms are normally between 1-10 years at which point the bank will then expect principle and interest payments for the remaining term.


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