What is Interest Capitalisation And Is It A Good Investment Strategy?

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Published on Oct 8, 2015


What is interest capitalisation and is it a good investment strategy to grow your portfolio and generate a passive income. Is it too good to be true?

What is interest capitalisation? And is it a good strategy to grow your property portfolio and increase your passive income?

Hey, I’m Ryan from onproperty.com.au, helping you find positive cash flow properties. Interest capitalisation, in basic terminology, is the process of adding interest on to a loan instead of paying it off. On a general loan, whether it be interest-only or principal-and-interest, you are charged interest generally on a monthly rate that you need to pay.

Let’s say we have a property that is $100,000 and, for a argument’s sake, let’s say it’s 6% per annum; which is 0.5% per month.

So we have $100,000 and 0.5% interest per month is charged to us – which is $500. So $500 per month is charged to us. On a general loan, we would pay that $500 per month to the bank or to the lender that we have that mortgage with – that’s an interest-only loan. With a principal-and-interest loan,

we would pay that $500 plus we’d pay a bit more to lower our debt down. With interest capitalisation, you don’t pay that money at all, it gets added on to that loan. So, we start with a $100,000 loan, let’s say it’s 6% interest or 0.5% per month.

What happens after the first month, rather than paying the $500, it’s added on to our loan and our loan becomes $100,500. The next month, we’re charged 0.5% on the new amount of $100,500 and that is then added on to the loan.

So our loan would be somewhere around $101,000, a little bit more because of accumulative interest or compound interest. So, basically, over time, your loan is getting larger as interest is added on to the loan.

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in Financial Planning, Investment Management, Retirement, Retirement Planning