Flaw with interest only loans. Are interest only loans better than regular mortgages?

Your loan salesman is correct from one standpoint. You first must determine how long you plan to stay in the house for. If you plan on staying for a short term then you should consider an interest only loan (5-7 years) because your home will increase in value. If you plan on staying longer a 30 year is better because you will gradually decrease the balance as times goes on.

The problem with an interest only loan is that you may decide to stay for the long term and then you will be stuck refinancing a few years later and perhaps the rates have increased.

If you shop around you should be able to find yourself a good interest only rate fixed for a few years.

Your decision should be based on a few things. Are you investing or are you an owner-occupier of the property? If investing, an interest-only loan is usually the way to go. You can help service the loan using the rental income and with the difference you save on a P&I (Principal and Interest) loan, you can make lump payments on the principal amount, therefore reducing the amount of interest you're paying anyway.

If you're an owner-occupier, interest only is still an option for you... if you're disciplined enough to make lump payments to the bank regularly enough, then it's a great way to go. Many people just find it easier to not have to think about making lump payments and just pay the monthly installment for the principal and interest all in one go.

There are other ways to reduce your repayments as well, such as making payments fortnightly instead of monthly, having your salary put straight into the account that you use to repay your mortgage, etc... Have a sit back and look at your circumstances to choose which is best for you, but if handled correctly an interest-only loan can put you in a better financial position long-term.

Unless theres some strange loan , an interest only loan is just that , you pay ONLY the interest on the money and NONE of the principal. Its often offered as interest only for a few years so people can afford to purchase , or on short term commercial property, where its to be sold within a few years.

Make sure you understand the conditions of an interest only loan before you take one. You may be better taking out a 30 year mortgage and pay it off in 20 years. Many loans have restrictions on making additional payments off the principle.

I would need the amounts , rates and term of the loans to tell if that could be correct.

You have to pay higher interest rate to get the benefit of a lower payment. Take it only if you have to.