Ask An Expert: P&I or Interest Only?

Why do some people choose loan repayments at principal and interest or interest only?  How do they decide which is better for that property?

Lena Li, ANZ Mobile Mortgage Manager, Answers 

Paula, when you take out a Home Loan, you have two repayment choices: principal and interest (table) or interest only.
 

Table repayments which is also the most common option and are more stable than other payment options.

The total amount of interest that must be paid over the duration of the loan is added to the principal, and then divided into equal repayments over the term of the loan.

With table repayments:

• you will know what your repayments will be so budgeting becomes easier
• the proportion of principal and interest in each of your repayments changes over time. Early on, you are paying more interest than principal. So if you sell your home within a year or two, the principal may not have substantially reduced
• as the principal is reduced over time you will gradually increase the equity in your home
• you can choose weekly, fortnightly or monthly payments
• you can choose table repayments on Fixed Rate or Floating Rate Home Loans.

 

On an interest only loan you only pay the interest with each repayment and must repay the principal, or amount borrowed, at the end of the loan term.

With interest only repayments:

• because you are not paying off principal over the term of the loan, interest only home loans are most suitable if you are expecting some capital gain to help...