Should I choose a Principal and Interest loan or an Interest Only loan?
Principal and Interest
A principal and interest payment it made up of 2 components:
- Principal: How much you have borrowed from the bank
- Interest: The extra money you pay for loaning the money from the bank
They are designed to pay off your home loan over the specified loan period eg. 30 years based on an amortization table. With this type of payment, as your loan balance reduces, so does the interest you pay over time. An advantage of this loan type is that by making payments off the principal part of your loan you will eventually pay of the loan in full.
Interest only loans are a product that allows you to repay the interest accrued on the loan. During an interest only period, you don’t pay off any of the principal loan amount, just the interest.These interest only loans can be fixed or floating or a mix of the two.
One of the benefits of this loan type is that individual loan repayments are lower. This loan type commonly appeals to investors as while a property’s price rises, they are gaining equity without paying off the principal amount. It also helps with claiming tax deductions from the loan. In addition this type of loan appeals to more astute managers of money. It allows good money managers, to repay their loan at a faster rate, if combined with a floating home loan which allows extra repayments without penalty to make principle reductions, as and when funds become available.
The most popular interest only period is usually five years and at the end of that time your loan will revert to interest and principal repayments unless we apply for an extended period at review time.