When using an interest-only loan borrowers are only required to make repayments equal to the interest and no principal repayments are made.
Typically, most lenders offer interest-only loans for terms of 1, 2, 3, 4 and 5 years. A few lenders allow a maximum term of 10 years At the end of the interest-only period the loan would cease or automatically roll over to a principal and interest loan. The borrower may renegotiate with the lender for another interest only period.
Usually the interest rate on an interest only loan is the same as that of a P&I Loan. Investors who still have a personal debt to repay will typically take out interest only loans in order to be able to direct all of their surplus funds to personal (non-tax deductible) debt repayment while meeting the minimum payment required on the tax deductible investing debt. This also allows them to keep those investment loans at their maximum tax deductibility.
If no personal debt is present, it can be good policy to repay investment debt. The small amount of tax deductibility lost by doing so is more than compensated by the benefits of obtaining equity in the loan and the underlying property can then be used for further leveraging into more property.
Interest only loan
Interest only loan reverting to principal and interest loan