This type of loan is commonly used by investors. It is invariably a short term arrangement (1 – 5 years), with payments made by the borrower being for interest only. With Interest Only loans, loan principal is not repaid until the end of the loan when the loan tends to revert to a 20 or 25 year Principal and Interest loan.

Often borrowers are given the opportunity to extend the 5 year interest only period at the end of the initial 5 years. In some cases the borrower may choose to revalue the property at the end of the 5 year period and then apply for another 5 year interest only loan.

The reason that this loan is particularly popular with investors is that Interest only loans make investment properties more affordable.

The capital appreciation that can be experienced on an investment property over a 5 year period, more than makes up for the fact that with Interest Only Loans the loan principal is not reduced over time.