Tuesday, 16 October 2007

Could you manage an interest-only loan?

Interest Only Loans
Incredible deal isn't it?

So incredible that it's sounds like it's not real?

So great that it allows you to free up money every month. It drops your monthly installments and you can afford WHOLE lot more house.

Now interest only loans this may be the perfect investment opportunity for those that know how to handle their finances. If you're a good personal financial advisor and you don't buy more mortgage than you can handle, I say go for it.

If you're not, I say contact a mortgage broker that offer normal home loans and don't be silly.

So what's the catch and why the advice, you may ask, well, lower monthly installments, ZERO equity for years and then BAM BAM BAM, monthly instalments to floor mother Russia.

You see interest only loans allow you to pay interest only, for a period of x years depending on the lender. The problem with this is that once those x years have passed by all those monthly payments you missed out, get added to your monthly installments once the interest portion is paid off! YOU SEE! WHOPPER OF A MONTHLY INSTALLMENT THEN KICKS IN!

Here's how it might work for a 5 year interest only loan:

  • Your payments would be fixed for the first five years at a certain interest rate - lets say, 10%.

  • For the next five years, you still might pay(depending on your options) just interest on the loan, but the rate would be variable and could increase by 1 percentage point every year, up to a rate of 15%.

  • In the 11th year, the rate remains variable, but the loan requires you make both principal and interest payments.

So the interest only loan is really for the investor who's looking for a quick in quick out option and is looking to sell his place before the 11th year or before the interest + loan payment option kicks in. Just remember though, that by choosing your interest only option, you're giving up the chance to fix yourself in with a good low interest rate and you could be kicking yourself in the teeth if you're not careful.

WizardMan out!


bahl isvet said...

Many say that the property market in south africa is currently experiencing its lowest sales figures in years, and for the upper end ofthe market; this is true.

The good news however, is that townhouses and sectional title properties are still selling and keeping the maret alive.

A lot of more expensive properties are currently sitting on the market for many months without selling or they are selling for a much lower price that the owners first wanted.

The current interest rate of 14% ( oct 2007 ) is putting a lot of presure on the market and that combined with the new credit act, is severely limiting the sales of higher end properties.

If you are selling a 3-bedroom full-title house in a normal residential area for anything above
R 960 000 ZAR, you can expect your property to be on the market for many months.
And even then, you might still not find a buyer for your price.

Townhouse sales however, keep the market ticking along and make for a growing percentage of the current successful sales. There are still a lot of buyers out there looking for a 2-bedroom simplex under R 650 000 ZAR.

Estate agent everywhere are feeling the heat of the current market pressure, but it looks like the current US property meltdown is unlikely to hit South Africa, due to the rise of the black middle-class looking to make property investments.

WizardMan said...

I couldn't agree with you more. Alot of people were expecting a big meltdown in the S.A. property market but it's not going to happen. We'll see a slowdown in sales but like you said, town houses and security complexes will always be on the up in South Africa. High levels of crime a major factor in this...

Thanks for the comments.