There are a number of strategies you can choose from to repay your home loan debt. The key components of loan repayments are the principal and the interest. The principal is the amount you borrowed from your lender to purchase the property. The interest is the cost of borrowing the principal.
When applying for a home loan, you can choose how you want to repay your loan. Generally, there are two types to choose from. One is interest-only repayments and the other is principal and interest (P&I) repayments.
An interest-only repayments is where you only pay back the interest amount for an agreed period of time, typically between one to five years. The main benefit of this is that it makes your repayments lower. The interest-only option is usually more beneficial to property investors because the interest is tax deductible on an investment loan. Also, this reduces the amount they need to pay in monthly repayments so less is coming out of their own pocket.
On the other hand, with a Principal & Interest loan, the repayment includes both some principal and some interest. This is the most popular type of loan with homeowners. The main benefit of this is that it steadily reduces the Principal owing, resulting ultimately in home ownership. This strategy is wise if you intend to live in the property for a long time.
Since Principal and Interest repayments cover both the Principal and Interest, they reduce the interest you’ll pay over the course of your loan compared to an interest-only loan where your interest amount will increase after the interest-only period. This is because principal is not being repaid, so it continues to accrue interest.
Your chosen loan type can make a huge difference to your repayments. To know how much difference, you can use our handy home loan calculator to compare loans and repayment types.