Could 'interest only' be a trap?

We sometimes talk to clients who want to reduce their outgoings by stopping repayments of their mortgage principal, i.e. going ‘interest only.’

Now, as Financial Advisers, we’re here to help clients achieve their goals. But we also need to ask whether best interests are being served. 

The point is that there may be other ways to get your household costs down, and still chip away at your mortgage. Whereas an interest-only strategy could lead to a much larger debt in the long term. Remember, the quicker you get rid of your mortgage, the sooner you can become wealthy.

What about shopping for groceries once a month, rather than once a week? Could you switch your phone, power and internet to a cheaper plan or provider? Even finding a cheaper petrol station near your home or workplace could save you hundreds of dollars annually.

Here's something else to remember. The Reserve Bank is pressuring lenders to ensure their customers are paying down debt. So they may require the rigmarole of a whole new loan application if you want to go interest-only, rather than simply rubber-stamping the change. 

None of this means an interest-only loan is wrong in every case. We’ll always work hard on your behalf to get the best deal. And we’re more than happy to spend time looking at the bigger picture and helping you achieve your long-term financial goals.