What are the Different
Types of Loan?

If you have found a home, chances are you have already spoken to a 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?

PRINCIPAL & INTEREST

Firstly, the principal is how much money the applicant has borrowed from the lender and interest is the extra money that must be repaid to the lender above the principal amount borrowed. The interest refers to the interest rate applied to the loan. 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.

INTEREST ONLY

Interest only repayments are pretty self-explanatory. For the period where the loan is interest only, only the interest of the loan gets repaid and the principal remains the same. These are popular for investors in Perth as people often take advantage of legal negative gearing tax benefits on their investment properties.

The loan balance stays the same over the interest only period, with repayments usually a lot lower than P&I repayments. With interest only one major thing to take into account is the principal is not being paid off and therefore the loan may take you longer to repay.

Lenders will normally have special conditions that apply to interest only loans. They can be advantageous however if you want to spend your money on other things such as home improvements or paying down your owner occupied property.

The majority of loans on owner occupied properties in Australia are paid principal and interest. This can be a good option as you can repay your mortgage off and work to becoming debt free on your owner occupied residence.

ARE YOU AN INVESTOR?

Having an interest only investment loan may be an option if you have an owner occupied home loan that you are repaying the principal on. This will allow you to repay your owner occupied loan, whilst paying the bare minimum interest only on your investment loans. In some situations, this may help with cash flow and may have taxable benefits for you.* A quality Perth Mortgage Broker may be able to give some brief limited guidance on some structuring advice when it comes to this option however, it is recommended that you receive independent financial advice from your financial adviser and accountant on this decision if you want to go down this path.

DISADVANTAGES OF INTEREST ONLY LOANS

The big disadvantage is that your mortgage balance never reduces whilst you are in an interest only term. For example, if you have interest only for 5 years on a 30-year loan term for $400,000 paying 4% interest rate your repayments for 5 years will be approximately $1,333 per month. You will pay this for 5 years straight if your interest rate doesn’t change and in that time you will have paid approximately $80,000 in interest repayments to the bank and your balance will still be $400,000 which is what you started with.

Another big risk is that you are more reliant on house prices rising than on principal and interest loans.

Your friendly mortgage brokers at Loan Monster in Perth can assist with discussing what type of loan may suit your personal situation. Go to www.loanmonster.com.au or call on (08) 9336 4489 today.

* The information contained in this website should not be taken as constituting personal advice. We recommend that you seek professional assistance before acting upon any information provided or linked on this website.