Repayment Structures
Investment Loan Repayment Types: Principal and Interest vs Interest-Only
When applying for an investment loan, it’s important to choose the repayment structure that best suits your financial goals. Two common options are Principal and Interest and Interest-Only loans. Here's what you need to know about each:
Principal and Interest Loan
With a Principal and Interest loan, your repayments cover both the interest charged on the loan and a portion of the loan principal (the original amount borrowed). Over time, this structure reduces your loan balance, helping you own your property outright faster.
Key Benefits:
- Build Equity: You reduce the amount owed on your loan with every repayment, increasing your home equity over time.
- Lower Total Interest: Since the loan balance decreases, you pay less interest over the life of the loan.
- More Predictable Payments: As the loan progresses, your monthly repayments typically stay consistent.
- Lower Interest Rates: Principal and Interest variable rates are generally lower than Interest only.
Considerations:
- Higher Repayments: Monthly repayments are higher than interest-only loans because you’re repaying both the interest and principal.
- Long-Term Commitment: Suitable for those looking for long-term financial security and planning to live in the home or hold onto the property long-term.
- Reduced Tax Benefits for Investors: For property investors, principal and interest repayments may not offer the same tax-deductibility benefits as interest-only loans, since only the interest component of repayments is tax-deductible.
Interest-Only Loan
An Interest-Only loan allows you to pay only the interest on your loan for a set period (usually up to 5 years). During this time, your repayments are lower as you’re not repaying the principal. After the interest-only period, the loan will revert to principal and interest repayments, however it is possible to extend.
Key Benefits:
- Lower Initial Repayments: Monthly payments are lower during the interest-only period, freeing up cash flow for other investments or expenses.
- Investment Strategy: Popular among property investors who want to maximize cash flow while waiting for property value growth.
- Tax Benefits for Investors: In certain cases, investors can claim the interest component of their repayments as a tax deduction, making this loan type more attractive from a tax-efficiency perspective.
Considerations:
- No Equity Growth: Since you’re not paying down the principal, you don’t build equity in your home during the interest-only period.
- Higher Long-Term Costs: The total interest paid over the life of the loan is higher, and repayments increase significantly when the loan reverts to principal and interest.
Which Loan is Right for You?
Choosing between a Principal and Interest or Interest-Only loan depends on your financial situation, property goals, and cash flow requirements. If you're unsure which option is right for you, reach out to our team to assess your financial situation and explore some tailored solutions.
