How can you show interest without seeming too interested?
If only investing in property was as easy as the questions posed in Women’s Weekly.
In this segment, I’m not trying to teach you the art of flirting, but, instead, unravelling the mechanisms behind the infamous interest only loan.
The concept's pretty simple, you borrow money but only pay the interest.
Where the complexity comes in, is when the term falls due, usually five years, you’re forced to come up with the money.
This really hit people hard during the Global Financial Crisis of 2007-2008 because coupled with a lending meltdown and a house price decline, people couldn’t come up with the money needed to service the debt.
How you would usually combat the approaching deadline is one of four ways:
1. Extend the term of the mortgage.
2. Refinance it with a competitor.
3. Automatically default to a principal and interest loan.
4. Cough up the money.
The appeal of this loan is you pay less now in the hope you can capitalise later.
Think of the average rental property investor with the usual costs of maintenance, rates, insurance, mortgage repayments and property management etc. Just imagine if you could pay less and make more? The risk with this approach is naturally if the you can’t service the debt with your rental income both now and when it converts to principal as well as interest, then you’re hoping like fuck house prices go up so you can at least leave with the shirt on your back.
This is one of those high-risk high reward moments where you really want to consider the best- and worst-case scenarios.
Simply point, can I pay it if needed and do you look like someone they’d want to keep paying it?
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