Interest Only (IO) Term Loans

Interest only term loans

This is an increasingly common feature available for new loans. For a period at the beginning of a loan, only interest is paid. The principal remains the same during the interest only period. The loan converts to principal and interest at the end of the interest only period, and the balance gradually reduces over the remaining term of the loan.

Once they do commence, the principal and interest repayments will of course be higher than a normal P&I loan because the term remaining to repay has been decreased by the interest only period. These loans are used mainly for investments, as the repayment amount is reduced to the minimum, aiding cash flow and maximizing tax deductibility.

Common features:

  • Interest only periods of one through five years or ten years.
  • Additional repayments: you can make extra payments at any time.
  • Redraw: repayments made in advance can be drawn back out.
  • Redraw methods: direct credit, debit card, cheque, BPAY, Pay Anyone.
  • Common payment frequencies: weekly, fortnightly, or monthly for regular repayments. One-off repayments are usually allowed for lump sums. It is common for interest only loans to have a monthly payment requirement.
  • Common payment methods: direct debit, salary credit, and BPAY.
  • Internet and telephone banking access.
  • Statements: usually monthly but at least 6 monthly, usually as at December 31th and June 30th.

Subcategories

Basic Home Loan: see P&I loans above.

Fixed Interest Rate: see P&I loans above.

Honeymoon: see P&I loans above.

Line of Credit

Lines of credit are increasingly common in the home loan market. The line of credit is a revolving credit product. The loan has a set limit and interest only repayments. You may redraw and repay as much principal as you wish. Lines of credit are very much like an overdraft in that you can use any available funds within the limit.

These loans often have the most features and can include access methods such as credit cards, ATM cards, and chequebooks. Additional payments can be made by direct salary crediting, direct debit, or over-the-counter deposits at bank branches with deposit books. Usually the minimum repayment will be the amount of interest charged in the current month.

Common features

  • Revolving credit period of ten, fifteen, twenty, twenty-five, or thirty years.
  • Additional repayments: you can make extra payments at any time.
  • Redraw: the loan can be drawn up to its limit at any time.
  • Redraw methods: direct credit, debit card, cheque, BPAY, Pay Anyone.
  • Common payment frequencies: monthly for normal payments. One-off for lump sums.
  • Common payment methods: direct debit, salary credit, BPAY, and over the counter by deposit book.
  • Internet and telephone banking access.
  • Statements: monthly.

Subcategories

Capitalizing Line of Credit: A capitalizing line of credit allows you to stop making payments of interest so long as the loan has not reached its limit. For example, you may have a limit of $100,000 drawn to $50,000. During the month, $500 of interest accrues and is added to the loan, taking the balance to $50,500. You do not need to make a repayment, as the loan is within its $100,000 limit.

Evergreen Line of Credit or No-Term Line of Credit: A line of credit that does not have a final repayment date. In effect, the loan can continue for as long as you can repay it. Usually subject to an annual review at the lender’s discretion.

Honeymoon or Introductory Line of Credit: A line of credit with an introductory interest rate lower than the standard rate, usually for a term of six or twelve months.

Amortising Line of Credit: A line of credit that has a reducing or amortizing limit. This product falls halfway between a principal and interest loan and a line of credit. It offers all the benefits of a line of credit: being able to redraw and repay within the limit, capitalization, and flexible access methods. It also has the safety net of a principal and interest loan in that the limit will reduce to nil by the end of the set term, usually thirty years. Not a common product offering, but it does have some key advantages over the standard line of credit for people who may fear never repaying their loans.

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