With so many options it can be hard to tell the difference some times. Keep reading to find out!
What are the different loan repayment options?
We may have already let it slip what these might be… principal & interest versus interest only loan repayments. We find these options are the most popular and not without reason. When you’re getting your home or investment loan, you’ll need to know which way you want to go.
Principal & Interest
Lets start with the basics! This one means you’re paying the interest the bank is charging you and paying down the principal loan amount. So over time you’ll see your principal loan amount shrink as you’re paying off that loan.
There are always pros and cons, and this is no different. The biggest pro here is that you’re seeing your principal loan get smaller and smaller over time. Seems obvious right. But seeing that debt go down over time can bring you a lot of comfort.
Because you’re paying down you’re principal the banks tend to leave interest rates as they are on these loans. On interest only loans banks will usually want to raise the interest rates, but principal & interest loans usually stay around the same. Who doesn’t love paying less interest?
With the benefit of a lower interest rate comes a difficult con. You’re repayments will be higher. This can make it a difficult option for some. You might have to dip into your cashflow to pay the extra, just to see your loan shrink faster.
You may lose tax benefits if you have an investment property. Reducing your good debt means there is less of a tax rebate as the principal amount reduces. It’s really important to get professional advice on the loan structure of your investment properties. It can be difficult to see how your future may be affected by your choices now. We want you to get the most out of your money and increase your cashflow.
As an investor
If you’re an investor you may feel like your options are getting pretty limited. But there are circumstances where you might consider a principal & interest loan. If you’re investing in property and don’t have a home loan, the benefits of a principal & interest versus interest only loan may be what you’re looking for. If all of your debt is good debt, then you can start paying down those investment loans with the same strategy as your home loan. If you can afford to pay the principal on your investment loans then you can strengthen your equity position quicker.
This equity is something you can borrow against another property to help grow your investment portfolio quicker. But be careful with this strategy and get the right advice first. Once you’re paid down that principal and used the equity for another property, you won’t be able to borrow that money against the same property again.
Interest Only Loan
You may be wondering when the bank will be expecting you to pay the principal of the loan. You will eventually have to pay it of course. For a 30 years loan the interest only term will be 5 years. After 5 years you’re loan will automatically revert to a principal & interest loan. You can extend this period if you need, but every bank is different. Always make sure you’re reviewing your loans and you’re getting the best deal you can.
We love it when our investment properties save us money. Paying your interest only on your investment loan means you can keep the tax deductible benefits of that debt!
The second pro is equally as exciting… lower repayments! You don’t want to pay more than you have to, so lower repayments ensures you still have a healthy cashflow.
You may be able to guess this next one, but by only paying your interest, you’re not paying down the principal amount. If you’ve been paying interest only for 5 years, you’re principal debt amount will still be the same at the end of those 5 years.
The next con… interest rates tend to rise. Interest only loans will usually be more expensive from an interest perspective. That higher interest rate does mean you’re getting less for your money and will end up paying significantly more to the bank than a principal & interest loan.
If you’re considering making some changes to your loans contact your accountant and your Rise High Mortgage Broker to get the right advice. You may also be keen to explore refinancing and learn more about debt consolidation to ensure you are making the most out of your hard-earned money. Ready to get started? Leave your details below and we’ll contact you!