Home loan repayment types
When it comes to choosing a home loan, one of the options that you’ll need to weigh up is whether to request principal and interest repayments or interest only repayments.
When you pay principal and interest repayments, each repayment goes towards paying off both the amount borrowed to buy the property (the ‘principal’) as well as covering the interest. By the end of the loan term (which can be up to 30 years), both the amount borrowed and the total amount of interest owed will be repaid.
Some other considerations for interest only repayments
It’s important to weigh up the following factors when requesting to pay interest only:
- Interest rates for loans with interest only repayments are higher – it’s important to be aware that the interest rate will be higher if you pay interest only instead of principal and interest.
- Increased repayments at the end of the interest only period – because the amount you’ve borrowed will need to be paid back in a shorter timeframe, the repayments will be higher than if you’d opted to pay principal and interest from the outset. The longer the interest only period, the higher the jump in repayments will be.
- You’ll pay more interest over the life of the loan – that’s because there won’t be any reduction in the amount you’ve borrowed during the interest only period.
- You won’t be building equity in your home as fast during the interest only period (equity is the value of your home less the amount you owe on it.)
It’s important to understand the loan repayment option you are planning to request and how this impacts you. Keep in mind the above considerations when requesting interest only repayments. It’s important to ask yourself first if you’ll be able to afford the higher repayments when the interest only period ends and if the short-term benefits of lower repayments will outweigh any long-term costs.
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The Detail
Conditions, credit criteria, fees and charges apply. Based on Bank of Melbourne’s credit criteria, residential lending is not available for Non-Australian resident borrowers. Interest rates subject to change. Before making a decision, it’s best to read the terms and conditions.
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This information is general in nature and 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 to your own circumstances and, if necessary, seek appropriate professional advice.
The information on our website is prepared without knowing your personal financial circumstances. Before you act on this, please consider if it’s right for you. If you need help, call 13 22 66.