Typically, home loan repayment will have principal and interest components. Thus, reducing your home loan gradually. However, with interest only loans, only interest is paid each month, leaving original principal amount outstanding at the end of interest only term. This means for example at the end of 2 years interest only term you will still owe same amount what you started with.
P&I
Benefits:
· You pay less interest over time
· You will pay off home loan at the end of your loan term
Considerations:
· Repayments are higher as you are repaying principal as well.
Typical scenario people will go with P&I is when rates are low as it was the case in last 3 /4 years.
Interest Only
Your repayment is lower during the term of Interest Only period as no principal is being paid.
Considerations:
· At the end of interest only, the repayments will be higher to repay principal over the remaining, shorter term.
· Typically, interest rates are higher that P&I loans.
Often people will choose interest only loans when the interest rates are high or are increasing rapidly, leading to uncertainly which in turn makes it hard for people to factor in abrupt increases. We are witnessing one such situation, where RBA has increased interest rates every month over last 6 months. Interest rates have moved from 0.1% to 2.6%.
As more fixed home loans move to variable rates over coming month, we anticipate analysing P&I V Interest only repayments for our existing clients, making sure they can decide what’s best for them to navigate uncertain times ahead.
For more information, reach out to us on hello@amitaggarwal.com.au
