INTEREST-ONLY vs. PRINCIPAL AND INTEREST
With an interest-only loan, your regular repayments are comprised of nothing other than interest charges. You do not repay any of the principal (or ‘capital’) at all. Interest Only loans are not advisable to the average home-buyer because at the end of the loan period you still have all of the principal to repay.
Interest Only loans, which have smaller repayments than principal and interest loans, are really designed for investment purposes. They enable you to hang on to a property which, during the term of the loan, hopefully generates some rental income and undergoes capital gain.
Interest Only loans often involve selling the property to repay the principal - which is not what the average home owner has in mind.
If you are buying a property with the intention of turning it into your home and living in it for some years, you should take out a principle and interest mortgage. This way you are repaying the debt and, at the same time, increasing your equity in the property. At the end of the loan period you will own the property outright.
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