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 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.