Principal

This is the amount you borrow.

Interest

This is what the bank charges you for borrowing the principal.

Loan term

This is the time over which you wish to repay the borrowings

Principal & Interest Repayments

With a principal and interest loan your mortgage payments cover repayment of both the principal and interest. A regular, minimum payment amount reduces your loan balance to zero over the specified loan term.

Interest Only Repayments

Interest only is when your repayments cover only the interest. No principal is paid down with interest only loans.

If you want to utilise interest only payments, you will be asked to nominate a period you want for it to apply. This is typically a time frame of 1 to 5 yrs. At the end of that time frame, your loan will automatically change to principal & interest. Repayments are typically higher from that point because the remaining term has been shortened by the interest-only period.

Benefits of Principal and Interest

The primary benefit of principal & interest is reduced interest charges. This is a result of interest charges being calculated using a reducing loan balance. Another benefit is that you own the property sooner if you pay it down faster.

Benefits of Interest Only

The primary benefit of interest only is that repayments are lower. This is because they do not include any principle. Lower repayments free up income for other purposes such as rental payments, living expenses or paying down other higher costing debts.

Risks with interest only

The risk with interest only is that you won’t be reducing the amount outstanding. This generally means you will pay more interest. Interest only can also prevent you from building additional equity in your property, particularly in circumstances where property prices have not increased. And, if prices were to drop, you could end up in a situation where your loan is greater than the value of your property.

 

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