Interest-only mortgage calculator

Interest-only mortgage calculator – Use the Atomic Home Loans Interest- only mortgage calculator to calculate how much the repayments on an interest-only mortgage will be and the total cost of an interest-only mortgage.

An interest-only mortgage will allow you to pay interest only on your mortgage for the first few years, after which you will be required to pay principal & Interest. It is worth paying attention to the results section and noting the difference in monthly repayments after the initial interest-only period has ended. You will notice that the difference is substantial.

This interest-only mortgage calculator is fairly simple to use if you are familiar with how an interest-only loan works.

Simply input the loan amount, interest rate, loan term, repayment frequency, interest-only period and your loan fee. You will then be able to produce results which show the difference in repayments while in the interest-only period and once off the interest-only period.

Additionally, you can work out what the total interest payable will be along with the total payments you will be required to make.

It is important to note that an interest-only loan will almost always cost you a lot more money in the long term.

So why Interest-Only?

Australian investors are obsessed with interest only loans. Some investors immediately see the value of interest only loans, while others prefer to pay down their debt immediately and opt for a principal and interest loan instead.

There are two main differences between interest only loans and principal & interest loans:

  1. With interest only loans, you don’t pay off the actual loan (the principal), you simply just pay for the interest accrued on the loan.
  2. Interest only loans almost always attract a substantially higher interest rate than their principal and interest counterpart

There are several reasons you would want an interest only loan. Let’s examine a few:

  • If you are buying an investment property, assuming you have an existing mortgage on your owner occupied property, it will allow you to make extra repayments on your owner occupied home loan. Note that the interest on your owner occupied home loan is not tax-deductible whereas the interest on your investment property is. That can mean a difference of 30% saving (in the form of a tax deduction against your taxable income) for each dollar put toward the principal loan on your owner occupied home loan instead of on your investment loan.
  • Interest only loans lower your cash flow commitments. This means you are liable to pay less each week, meaning you have more left over to reinvest. Ideally, you won’t be spending the difference on luxury items.
  • Interest only loans can allow you to hold on to an investment property for a longer period of time, given it will be costing you less each week to hold the property. This could mean the difference between having to sell a property and being able to hold onto the property during a market downturn.
  • Interest only loans allow investors to speculate a lot more on the value of property increasing, given the lower holding cost.

Since the Australian Prudential Regulation Authority (APRA) tightened lending requirements on investment loans and interest loans, the cost of getting an interest only loan becomes far deeper than it previously has.

In fact, many a times, the highest interest only rate is so much greater than the equivalent loan size in principal & interest, that it becomes cheaper each week to have a principal and interest loan as opposed to just an interest only loan.

For example, certain big four banks right now are offering interest only rates from 5.03%, whilst principal and interest rates for investment loans are starting at 3.88%. On a $500,000 loan, the loans would look like this for the first two years:

  • Principal and Interest loan: $542 per week
  • Interest Only loan: $483 per week

The difference in repayments is only $59 a week, but you are paying off much more of the principal. In fact, after 2 years of paying the extra $59 a week, you would be better off by $19,820 on your investment loan. However, on your owner occupied home loan, if you took up the interest only loan for your investment property, being able to pay an extra $59 a week for those initial 2 years will save you $6,359 in interest on your owner occupied home loan.

Given the sizeable difference in interest rates, you would be better off by $13,461 by sticking with principal and interest.

On the contrary, if you’re able to attain an Interest Only loan that is only slightly more expensive than the equivalent in principal and interest, you are almost always better off having interest only for your investment property while you make the additional repayments onto your owner occupied home loan.

For instance, certain smaller tier lenders are still offering interest only investment loans at 4.21%. When comparing loans for an investment property and you’re tossing up between a 3.88% principal and interest loan, or a 4.21% interest only loan, here’s what the repayments would look like on a $500,000 loan and what the impact would be on your mortgage.

  • Principal and Interest loan: $542 per week
  • Interest Only loan: $404 per week

Here, the difference is a whopping $138 per week. Rather than putting that $138 per week toward you investment property (where interest is tax deductible) you could put that $138 toward your owner occupied home loan. By doing so, in the first two years you would reduce your home loan by about $34,753 whilst still experiencing the tax benefit on the interest accrued on your investment loan.

Without trying to make things more complicated, I will leave things there. The point I want to make is that for investment properties, an interest only loan can be a very rewarding strategy on your quest to mortgage freedom.

Keep in mind, the biggest negative with interest only loans is that you don’t actually pay down the loan. If you’re investing using an Interest Only Loan and hope that the property will increase in value over the long term, then you can certainly consider reap the reward from it. Then again, it’s speculative investing; no one can truly predict what will happen with property prices or the economy.

Please note, this information is fairly general. It is not to be deemed as financial advice, but more so simply to explain the value of an interest only loan product. You will need to speak with your broker or your banker to get a more tailored analysis and review of your personal situation. You should speak to your accountant to get their advice on the tax benefits with interest only loans.

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