If you own a home or are looking at buying a home, chances are you have already spoken to a Perth mortgage broker who has looked at different lenders and what they can offer. Most lenders will offer Principal and Interest repayments or Interest only repayments.
So what is the difference between all these different loan types?
What are Principle and Interest Loans?
Firstly, the principal is how much money has been borrowed from the lender and interest is the extra money that must be repaid to the lender above the principal amount borrowed.
When you make a principal & interest repayment you are paying part principal and part interest to the lender. The way home loans are normally structured by lenders results in little of the principal being paid off in the first few years of paying your mortgage.
The majority of the P&I repayment will be interest and as you begin to pay down the loan. Gradually as your loan matures you will begin to pay off larger portions of your principal. Offset accounts can also be linked to some principal and interest loans that may help pay off your loan quickly in some situations.
What is an Interest Only Loan?
Interest-only loans are quite easy to understand and self-explanatory. With this type of loan, you are making repayments through repaying the interest of the loan. The positives of this are that the repayments are usually lower than a P&I loan
With interest only the principle is not being paid off for a portion of the loan and this typically means that it will take you longer to repay. Lenders will typically have special conditions that apply to interest only loans.
Interest only loans are very popular amongst investors as they can keep their investment debt high and claim tax deductions and other benefits. They are also beneficially if you want to spend your money on other projects such as home improvements, rather than paying off your home loan.
However, they can be huge risks involved with choosing interest only loans and not repaying debt on your home loan, for example if property prices decreases and you haven’t paid off any principal. Offset accounts can also be linked to some interest only loans that may help pay off your loan quickly in some situations.
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