Understanding home loan repayment options
There are two main repayment options which customers may consider when choosing their home loan:
- Interest only repayments which only cover the interest on the principal borrowed, fees and any applicable government charges.
- Principal and interest repayments which in addition to covering interest on the outstanding principal, fees and any applicable government charges include an amount which goes towards the repayment of principal. Principal and interest repayments are calculated so that the entire principal will be repaid over the term of the loan.
How does an interest only loan work?
There are limits on the periods for which interest only repayments are allowed. At the end of the interest only repayments period, the loan will automatically revert to principal and interest repayments and so the monthly repayments will generally increase.
Some reasons people choose interest only repayments
- Property investors may use interest only repayments to minimise their tax liabilities and maximise their deductions.
- Customers may require or desire flexibility with their repayments.
However, it is important to consider your own personal circumstances
Some things to be aware of when choosing interest only repayments
- Once the interest only period ends, repayments will be higher.
- As you are not reducing the principal amount during the interest only repayments period:
- you will pay more interest over the life of the loan compared to a loan with principal and interest repayments throughout its term
- the principal and interest repayments after the end of the interest only repayments period will be higher than they would have been if the loan had principal and interest repayments throughout its term
- your equity in the home (ie, the value of the home less the amount you owe on it) will not be as great as it would have been with principal and interest repayments. If the property market stagnates - or if it falls - you could run the risk of having no equity or even negative equity in your home (ie, the value of your home is less than the amount you owe on it).
- If interest rates rise, the interest only repayments will also increase.
Things you should know
This information has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information, having regard to your objectives, financial situation and needs and, if necessary, seek appropriate professional advice. The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation