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July 2017's Property Gazette
Published by Scott Miller
Choosing Between an Interest Only and a Principal and Interest Home Loan
It’s plain and simple, there is a lot of options out there when it comes to home loans. What’s not so plain or simple is choosing the right one for your circumstances. As mortgage brokers, part of our job is to help you obtain the best mortgage for you and that includes repayments too. We understand the different loans like the back of our hands and want to make sure you do too.
Today we’re looking into the differences between an interest only loan verses a principal and interest loan. Both have their pros and cons and both suit different people at different times in their lives. Let’s dive in and learn some more about them…
What’s an Interest Only Loan?
An interest only loan is when your repayments only pay off the interest your loan has accumulated, not the actual principal or amount you’ve borrowed. This means your loan does not get smaller over time, but you will have smaller repayments to make as principal repayments are not added. The amount of interest you are charged stays the same, as you are no reducing the amount of your loan.
What’s a Principal and Interest Loan?
A principal and interest loan is when your repayments cover the cost of the interest your loan has accumulated, as well as a small piece of the principal. Initially, the principal repayments are very small and the interest large. But as time goes by, your interest is lower as the amount of your loan becomes smaller.
Should I Pick a Principal and Interest Loan or an Interest Only Loan?
First up, you need to consider why you’ve got the loan in the first place. If you are an investor and your rent covers your mortgage with maybe a little left over, you may be quite happy not to reduce the size of your loan. Investors often benefit financially when they sell the property, which they see as the long-term goal.
But if you are a home owner, your goal is often to end up owning your home mortgage free. Obviously the early you repay your loan the better, with less interest being paid overall and being able to keep the loan repayments in your pocket, not your lender’s.
While both loan options are valid choices, the main thing to consider is whether it’s important to you to lower your loan amount or not. If you just pay the interest only, you won’t be gaining equity in your property.
We’d love to chat with you in more detail about the pros and cons of both loan repayment options. One of the things we have help you with is a rapid mortgage reduction. We can show you how to reduce the length of your mortgage, helping you save thousands in interest costs.
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