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Thread: Interest only mortgage can be a really good leveraging tool

  1. #1
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    Default Interest only mortgage can be a really good leveraging tool

    By: Zeng Han Jun, CPCG, Singapore

    There is no fallacy about interest only mortgages. The fallacy lies with the consumer instead. An interest only mortgage can in fact be a very useful leveraging tool in the hands of an experienced property investor. Just like how a flight expert can create beauty and wonder with a fighter jet airplane, a rookie, on the other hand, can cause serious trouble to himself.

    What is an interest only mortgage? Interest only mortgage is not really a new product in Singapore. It is just that all along, it was not offered as a product but merely as an alternative to consider when one has problem paying for a current mortgage. For example, you are having cash flow problem while servicing your current mortgage. You write in to the bank, stating your current problem and how long it may last. The bank might structure an interest only plan for you so that you need only pay for the interest, for a certain length of time. By opting for an interest only plan, you will pay less in installments to the bank for the time being.

    An interest only mortgage works similarly to the example I have mentioned above. An interest only mortgage allows you to pay just the interest for a certain number of years. The payments that you make within this time period will not be used to reduce the principle. However when the interest servicing period ends, you will have to pay the principle in full to the bank. There are other options to paying the sum in full to the bank:

    1) Refinance the interest only mortgage to a normal housing loan;
    2) Sell off the asset if its value has appreciated and use the proceeds to pay off the loan;
    3) And others.

    An interest only mortgage allows you to buy a property by paying with low installments so that you can divert more cash into other types of investments.

    For example:

    Your mortgage balance: $300,000

    Interest rate: 4%

    Loan Tenure: 30 years

    Principle plus Interest: $2470

    Interest only: $1000

    Difference: $1470

    An astute investor will try to use the interest only payment so that he pays only $1000 instead of $2470; He then uses the remaining $1470 to invest in tools that may yield a return that is higher than 4%. If the investor does not have enough discipline. He might use the freed up cash to buy other things like television, holidays and etc. In this case, he better opt for a normal housing loan instead. It is only suitable for those who are financially diligent if they were to take it up for investment purpose.

    An interest only mortgage is also good for salespeople, business owners and anyone who do not have a fixed cash flow. The mortgage allows them to pay the least for their installment. Even if their cash flow for the month is really low, they can be assured that mortgage installments are already the least and does not take up a high percentage of their earnings. However, they must have a clear plan of what they are going to do after the interest only period ends. An uninformed and ignorant decision to take up an interest only mortgage can be really nasty.

    This type of mortgage can be good for people who know that they will only be living in the house for 3 years or less. If a couple buys a house and plans to move away three years later. It does not make much sense to pay down the principal. Since they will only be staying for a short period of time, they can take up an interest only mortgage, free up some cash for other usage or investments. When they decide to move to their dream house, they can then apply for a normal mortgage.

    If you are interested in an interest only mortgage, take some time to read up, talk to your advisor and do some calculation on how it can be beneficial for you. Remember that it can be a very useful tool for investment if you have a clear idea of how the instrument works, but it is certainly not for the average guy.



    This article from CPCG is currently being protected by Singapore and International Copyright Laws. However please feel free to republish this article, provided that you include working links to our website: www.cpcgonline.com and www.cpcgonline.blogspot.com. We appreciate your kind gesture. For any enquiries, please email us at [email protected].
    Last edited by Zeng Han Jun; 03-09-08 at 02:27.
    Mortgage Advisory and Brokering Services
    http://www.cpcgonline.com

  2. #2
    Junior blackjack21trader's Avatar
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    Keep your articles coming. I find them very good and informative !

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