The combination of negative gearing and capital gains tax means interest-only loans can make sound financial sense. They can also create the opportunity to actually pay your loan off faster, but that is a whole other topic! So for now, let’s run through three reasons to pay interest-only on your loan.

Flipping your home to an investment

When you flip your home into an investment, you want to be able to claim the highest possible tax deduction. Paying P&I while it’s a home loan will reduce later interest payments and therefore the possible deduction. I personally pay interest-only on all my loans and put any extra repayments in an offset account.

Cut non-deductible debt

The interest rates charged on unsecured debt like car loans, personal loans and even credit cards are, usually considerably higher than the interest rate charged on a home loan. It makes sense for you to use the money you save by making interest-only mortgage repayments to pay down any non-tax-deductible debts with higher interest rates first.

During the property growth cycle

This could backfire if the property market slumps sharply but the idea here is that you minimise your mortgage repayments in the short term while your property value and your equity grow. For example Sydney suburbs went up more than 20% in the past year, so this strategy would have kept money in your pocket but still improved your equity.

A warning though, paying interest-only frees up your cash flow,  but if you end up using that extra cash to pay for ‘stuff’ rather than improving your financial position, it could be wasted money.