Whether an interest only home loan or a principal and interest one is best for you greatly depends on your financial goals. We're going to go over what each form of repayment entails, and when they might be right for you.
Principal & Interest
When you repay a loan, generally speaking, the money you're paying pays down the 'principal balance' and the interest the balance has accrued. This is principal & interest repayment. There are many benefits to P&I repayments;
You will be paying down your principal balance and the interest it accrues from the start of your mortgage.
You could end up paying less interest over the term of your loan as the principal interest will go down with each repayment, hence the interest will decrease too.
P&I loans usually have lower interest rates (but these are subject to change so its important to check)
Generally you will have more borrowing power if you choose to go with P&I
Getting approved for a refinance is easier with a P&I loan
Your building equity in your property faster; because you're actually paying off your principal balance you're getting more equity in your home with each repayment.
Interest Only
Interest only repayments mean you'll only be paying the interest charged against your loan. These are normally subject to a finite 'interest only' period. The repayments during this period will be lower than if they were P&I - but because you'll eventually have to pay the principal balance, keep in mind your repayments will increase. There are some practical benefits though to interest only repayments:
Minimum repayments during the interest only period will be low
May suit people better depending on their investment objectives as well as tax and investment arrangements
Leaves you with more funds at the outset of your loan to set up your property. Or if you're investing in property, you can leverage funds because they aren't tied up in your property from the outset.
Ultimately, whether a Interest Only or P&I loan is best for you will depend on your circumstances and financial goals. You can talk to one of our experienced brokers to find out what's best for you!
