With the recent changes to lending regulations and requirements, enforced by the Australian Prudential Regulation Authority (APRA), making it more difficult to secure finance for an investment property and also widening the interest rate gap between Interest Only and Principal & Interest only home loans, It has become more important than ever to understand the strategy between using Interest only and Principal & interest loan repayments; which is why seeking the advice of a professional mortgage broker can give you that much needed extra edge in order to take advantage of the best loan opportunities in the current market.
But first, what is Interest only?
If you’ve been directed to this article then it means that you most likely already have some idea of how loan repayments work. It’s quite simple, as the name implies Interest only home loans require you to only pay the interest on the loan for a set period. Whereas, Principal and interest require you to pay both the principal (the loan amount) and the interest.
- Typically lasts a maximum of 5 years to 10 years,
- You do not have to repay the principal on the loan (the loan amount),
- The repayment per period is lower than principal & interest,
- After the period ends, the loan reverts to normal principal and interest repayments.
Principal & Interest
- Requires you to repay both the principal and Interest components throughout the life of the loan,
- It has a higher repayment per period than Interest only.
What is right for me?
The Short version: Traditionally, if you want to manage your cash flow and/or maximise the negative gearing benefit of your investment home loan, then an Interest only loan may be the right choice for you, On the other hand, if you want to pay off the loan faster, maximise equity and take advantage of far better interest rates, then a Principal & Interest loan will suit your needs better.
The Long version: It depends, while Interest Only does allow you to maximise the negative gearing tax benefit from your repayments and generally make lower repayments, if the property market takes a turn for the worse and your property does not grow in value, you could be left in a situation where there is no equity in your home at the end of the period. This is especially unfavorable and puts you in a risky situation if you are forced to sell the property due to unforeseen circumstances.
The recent widening of the gap in interest rates between Interest only and Principal & Interest loans also means that, while the repayment of Interest only may ultimately be lower, the interest that you pay is however much higher than principal & interest loans. In today’s market, it is common to see differences of 1% or more between interest only and principal & interest home loans.
With recent major bank announcements of increasing interest-only home loan and reducing P&I owner occupied home loan rates, below are some comparison examples for some of the major banks based on $500,000 Home loan under interest only and principal & interest repayments. Notethat non-bank lenders will often provide products with even better rates.
|Principle and Interest (Standard Variable rates)||Monthly Repayment||Interest-Only (Standard Variable rates)||Monthly Repayment||Differences in monthly repayment|
|ANZ Owner Occupied||5.20%||2745.54||5.80%||2416.67||$328.87|
|ANZ Owner Investment||5.80%||2933.76||6.26%||2608.33||$325.43|
|Westpac Owner Occupied||5.24%||2757.93||5.83%||2429.17||$328.76|
This means that as long as you are able to afford the slightly higher monthly repayment, you can enjoy a much lower interest rate under a Principal & Interest repayment structure. Ultimately, you will not only have a better interest rate but also pay off the principal on your loan, allowing you to access the equity in your property much sooner.
At the moment, we have wonderful opportunities from a non-bank lender for principal & interest home loans starting from 3.69%. Simply pick up the phone and call our enquirer line on 1300 880 123. We can provide you with an in-depth consultation and help you secure a great opportunity without any of the hassles.
About the author — John Lin
Specialising in providing high-quality residential, commercial and asset finance lending solutions to VIP Mortgage Solution’s partners and customers across a fast-growing network throughout Australia.
With a flexible forward-thinking approach and accreditation with over 25+ lenders, both major banks and non-banks, John provides a quality tailor-made service that places focus on the customer first. Consistently delivering the most suitable and competitive home loan, out of hundreds of different products on the market, to each client.