An interest-only loan involves making a monthly repayment which is sufficient to pay off the interest which has accrued during that month. You will not be repaying the principal. So, you will have to make alternative arrangements to make repayment under a separate investment vehicle. Here is how to use an interest-only calculator to determine how much money you will save.
How to work an interest-only calculator
You will need to decide how much money you want to borrow. You may just need a mortgage based on your existing requirements. However, other homeowners choose to consolidate debts or improve their home. You need to establish whether this is affordable to you. It is better to figure this out now than after you have borrowed the money. Interest rate (APR)
Your credit profile will determine the Annual Percentage Rate (APR) on the loan. As your credit score falls, the rate of interest you will need to pay rises. You may decide to refinance your mortgage again in the future to lock-in at a lower APR. The rate of interest is affected by the type of mortgage. A one-year fixed-rate loan is cheaper than a five-year fixed-rate mortgage. Mortgage term
The term of your mortgage is not that important because it can be changed when you refinance. However, you need to consider how long you want to borrow money because this will affect the investments that you select to repay the principal.
Risks associated with interest-only loans
Lower monthly repayments
You are only repaying the interest. So, the repayments will be lower and more affordable to you. However, unless you establish a way of repaying the principal at the end of the term, you will need to set up a separate savings or investment plan. Repayment of the principal
You will need to pay a sufficient sum of money into your savings plan to raise enough money to pay off your loan. The amount which you need to invest depends upon the projected rate of investment growth. It is advisable to add some margin and seek advice from a financial advisor before you decide how you should proceed. Do you need to repay off the debt?
Not everyone who chooses interest-only rates needs to pay off the principal. For example, an interest-only home loan is popular with buy-to-let investors because they usually cash-in on their investment before the end of the term. Other people choose to take out another loan or remortgage their home when their circumstances change.