When signing up for a mortgage, most homeowners can choose to repay their loan with principal and interest (P&I) payments or make interest-only loan repayments.

Your weekly, monthly, or fortnightly repayment will pay down some of the loan principal and the interest you have accrued when paying principal and interest. This means that you are paying down the sum of your mortgage over time.

Paying interest only means you are only paying the interest accrued. Eventually, you will be required to pay back the principal balance, which means an interest-only payment loan is for a limited period only.

What are the main differences between an interest-only loan and a principal and interest loan?

Interest-only

With an interest-only loan, your repayments are lower because you are not paying off the principal sum of the loan – just the interest. Other features of using an interest-only repayment structure include: 

• When the interest-only period ends, your mortgage repayments will increase because you will be paying the principal balance plus the loan interest.
• An interest-only loan period can last anywhere from one to five years, depending on the bank.

An interest-only loan is typically best suited to an investor, as the property might need to be sold to pay the loan back. If the investor has bought a quality, well-located property, he or she should enjoy some decent capital gains. 

Principal and interest loan

Principal and Interest loans generally have a lower interest rate, and over the life of the mortgage, you could end up paying less interest as the balance is reduced with each repayment.

Also, with a principal and interest, loan you’re paying off the balance from the get-go, which is why home buyers generally prefer P&I repayments. When they have repaid the loan, they should in theory own the property outright. So, while opting for P&I payments can save on interest, it is also a great wealth creation strategy.

To find out more about the right home loan repayment solution, contact Our Broker on 1800 913 677 or email us at enquiries@ourbroker.net.au to make an appointment.