P&I vs Interest Only
Principal & Interest
The process of paying interest and parts of the loan every month is called principal & interest repayments
Principal is the loan itself, so when you are paying principal, it means you are reducing your loan amount over time.
These repayments can be organised as a weekly/fortnightly or monthly repayment. Depending on each person’s preferences.
Usually loans are 30 years, however could be shorter depending on the age of the client.
Interest Only
The process of paying only the interest every month is called interest only repayments
Interest is what the bank charges on your loan, for the purposes of providing you with the money. Interest Only repayments means your loan amount itself will not change for the duration of the interest only period.
These repayments can also be organised as weekly, fortnightly or monthly, depending on preference
Usually, interest only periods can last for a maximum of 5 years(depending on the bank), with the rest of the loan term being principal & interest.
FAQ:
How do I pay less interest over the 30 years of the loan?
Principle and Interest usually has lower interest payments over the 30 years, as you are slowly reducing the loan itself over the period. However, in some cases, interest only is more beneficial because of taxation strategies & freeing up more cash flow every month.
If I have savings offsetting in my Principal & Interest Loan, why are my repayments the same?
The monthly repayments for Principle & Interest Loans are based off the following factors:
Interest Rate:
Loan Term (duration of the loan)
Loan Amount
If you have savings offsetting the loan interest, so you are paying less interest, what ends up happening is more money will be allocated to principal every month, meaning you will pay down your loan quicker than the original 30 year loan term.
Why would you go interest only?
Sometimes people prefer interest only as this assists them better in their taxation strategies which are set up by their accountant. Furthermore, interest only allows more cash flow on hand, meaning your repayments to the bank every month is lower, despite having a slightly higher interest rate.
Why are interest only rates higher than principal & interest rates?
This is because there is slightly higher risk on interest only loans, as the clients are not actually reducing their loan amount over time. Which is why the banks will charge a little more, due to the higher risk associated.
Why are my interest only repayments different every month?
Your loan accrues interest on a daily basis, however the banks charge you monthly. As every month has a different number of days, as well as variations in your offset account, this could cause your monthly interest only repayments to differ. Furthermore, changes in the interest rate will also affect your repayments, however changes in the interest rate are usually not a monthly occurrence.
Information Disclaimer:
Any advice provided is general and does not take into account individual objectives, financial situation and needs. All individuals should consider whether the advice is suitable for them and their personal circumstances.
