Why Interest Only?
I am a big believer that all mortgages should be paid on an Interest Only basis. I know it sounds bizarre, as you will never pay off you mortgage and the total amount of interest you will pay will be enormous. This goes against everything that we have been taught in the past. Our previous generation always advised that debt was bad and should be paid off as quick as possible.
My belief, and it is only my belief, is that if you keep your outgoings as low as possible then you can have reasonable standard of living while keeping your options open for the next investment opportunity. I have seen a person who purchased a piece of land for $2,000 many (many) years ago. They ended up selling it, for a profit I might add, as it was too expensive to keep paying the mortgage. However, if they kept the mortgage repayments on interest only it may have been more affordable and they could have held on to it. It would be worth approximately $1,500,000 in todays market price. Even if they still had a loan of $2,000 now it would look like pocket change. That’s inflation for you.
Obviously, if you have extra income with nothing to do with it, then feel free to pay off that mortgage. Qualifying this, you should start with paying off the mortgage on your family home as most of the time it is not tax deductible.
Interest Only Example
The difference on a $500,000 loan at an interest rate of 4.5% is:
Principal & Interest over 25 years = $2,780 per month
Interest Only (no term) = $1,875 per month
The difference is $905 per month that could be used for improvements to increase the properties value or put towards your next investment property.
Say that the property is rented for $600 per week which is $2,600 per month. You would have to put in an $180 per month from your personal funds to cover the Principal and Interest loan.
On the other hand, you would have $725 left over after paying your Interest of $1,875. This provides a better buffer if any maintenance or unexpected expenses arise.
Please consult your financial advisor to see if Interest Only is suitable for your financial circumstances.