Reasons to pay principal and interest

Buying a home is one of life’s big milestones, up there with events like graduating, travelling the world or starting a family. That’s why it’s important to know what you’re in for, how you can best manage your home loan… and how you could pay your mortgage off sooner.

Considering the options

An option you have is to make principal and interest repayments – which means making repayments on both the loan amount (the principal) and the interest on that loan. Another option that some people consider – for both homes to live in and investment properties – is an interest only home loan, where your mortgage repayments are limited to just the interest for an agreed period of time (usually one to five years).

The appeal of an interest only home loan is easy to understand, with lower repayments upfront making the journey to owning your home seem a lot more affordable. However, repayments may be higher at the end of the interest only period. So what does this mean for you in the long run when it comes to reaching your goals? There are other factors to consider and an interest only home loan should be carefully considered with your financial adviser before deciding to choose this repayment option.

We’ve broken down the reasons why principal and interest repayments may work for you.

Considering the options below

1. Lower interest rates

All interest rates are not created equal. While your payments are lower for the initial interest only portion of your loan, the interest rate itself is generally higher on an interest only home loan. Paying down a portion of the principal loan in addition to the accrued interest each month means you could have access to competitive rates and pay less interest over time, setting yourself up for the future.

2. Lower repayments overall

Regardless of the repayment option you choose, the length of your loan remains the same. With an interest only loan, when the interest only period ends you’ll still have the full principal of the loan to pay off, but in less time. This means that when your interest only period finishes, your monthly repayments will be higher for the remaining length of your loan. Once you’re accustomed to only the interest amount being debited each month, you may feel the pinch when your regular repayments increase.

3. Build up that equity

Equity is the difference between the value of your home and the balance owing on your loan. When you start to pay off the principal of your loan, and if the value of your property grows, that gap (your equity) increases, which may allow you to access funds for renovations or an investment property. You can even choose to make extra repayments.

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Things you should know

Related document:
Download the Choosing Your Home Loan Repayment Option customer information sheet (PDF)

The information contained in this article is of a general nature and is not intended to be nor should it be considered as professional advice.

You should not act on the basis of anything contained in this article without first obtaining specific professional advice. To the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL / Australian credit licence 234945, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this article.