When you should and should not consider Interest Only Lending?

There’s a lot of media noise out there at the moment around interest-only lending, so I thought it’s important in this How To Session we talk about why we would and why we wouldn’t use interest only lending options.

 

So I want to start with why we wouldn’t use interest only lending.

Now, it’s logical when you think about it — but we should never, ever stretch the family budget to try and get into a property if it’s going to mean financial hardship and stress, in regards to looking after our household financials. It just isn’t worth it. Again, if you think about it logically — why would you borrow money and continue to pay interest? It just isn’t a sensible thing to do. Now, that’s true.

So, if you’re going to look to buy a home then I wouldn’t be advocating interest-only lending.

However, where I do advocate interest only-lending is what I call Wealth Building Strategies.

So if you’re thinking about building out wealth, then the impact of interest-only lending is definitely a good choice. I’ve also said in the past that I’m happy for interest-only lending on owner-occupied properties and debt, so long as I’m putting that money to work.

There are a couple of important caveats here that we need to focus in on.

The first one is know your numbers.

It’s absolutely critical that you do your cash flow, for both today and for the long-term. Your household cash flow is going to change over time. It’s going to have some ups and downs. If you’re going to be starting a family, it’s also going to have some ups and downs around unemployment and being employed. So, it’s absolutely critical to know your numbers.

Build a substantial buffer.

If you don’t do this, you are at risk of the house of cards falling down around you. So I cannot stress this point enough: make sure you absolutely know your numbers and do detailed cash forecasts in addition to that.

Also understand the risks.

Both Bryce and I have done many How To Sessions on risks and understanding those risks. So why don’t you go and check out the videos on the risks associated with investing in property.

Now, I’d love to hear from you as well. In terms of why you might think investing or using interest-only lending is smart, or a dumb idea. So I look forward to reading your comments below: