Principal and Interest or Interest Only Loans?

What’s the difference?

P&I or IO

The terms Principal and Interest and Interest Only refer to the two repayment types of home loans.

When you take out a home loan, you will typically be paying off the principal of the loan and interest on that on each repayment.  This is referred to as a Principal and Interest, or P&I repayment type.

Your lender may provide the option to choose Interest Only repayments for a specific term of your loan. This is a temporary reduction in payments as you don’t pay off the actual principal of the loan. Interest Only repayments are limited because you have to repay the principal balance eventually.

 

Find out how your repayments could differ between P&I and IO repayments on our easy to use calculator.

 

What are the main differences between the repayment types?

P&I

–          Higher repayments because you pay down the principal loan balance

–          Pay less interest over the life of the loan as your principal balance is reduced by each payment

–          As you pay down your loan, equity builds up which you can access later

–          Generally have lower interest rates, but always check with the lender

–          Available on all types of securitised mortgages

Interest Only

–          Lower repayments because you’re only paying interest on the balance

–          Despite lower regular repayments, you will pay more interest over the life of the loan as principal is not paid down

–          Equity can only be gained if your property has gained in value over time

–          Higher interest rates or a rate loading on your current loan product

–          Depending on the lender, IO may only be available for Investment purposes or certain owner occupied loans.

 

Why would I switch to Interest Only repayments?

There are a few reasons borrowers opt to go Interest Only.

  1. If you’re in a pinch, you can apply with your lender for a temporary Interest Only period. This helps reduce your repayments for the agreed period and increase cash flow or your savings.

 

Check with your lender before applying for IO repayments as each lender is different and there may be requirements or restrictions.

 

  1. Interest Only repayments are popular among investors for claiming additional tax deductions, as well as increasing cash flow. Instead of gaining equity by paying down the loan principal, investors using IO repayments tend to wait for the property to rise in value over time, then sell it to get maximum return on their investment.

 

There is the risk that property prices slump instead of rise. Consult a financial planner to find out the best option for your investment.

 

Important to remember

Be prepared for when your Interest Only period ends as your repayments will increase drastically to begin paying down the principal balance.

Investors may need to regularly refinance their loan after each Interest Only period ends, or negotiate an extended IO period with the existing lender. This can be either beneficial in netting a better deal down the track, or troublesome if interest rates rise.

It’s important to discuss your options with a lender and sometimes financial planner to make sure you’re getting the best deal for you down the track.

 

 

Lend Ezy’s Ezy Investment Variable and Ezy Investment Fixed loans have the option to go Interest Only for up to 5 years. Give our Finance Managers a call to discuss your options on 07 5619 7222.