Interest only vs principle & interest loans

When is the right time to use Interest only vs Principle and Interest

There is always an endless debate between the two. With many people opting for Principal and Interest so you can start ‘smashing’ the principal component of the loan down. However, when you analyse them closely there are many factors that should drive your decision. I want to look at these factors and how they might benefit you.

Interest Only

Pretty self-explanatory, as the name suggests, you’re only paying down the interest of the loan that is charged to you and not paying any of the principal off. These loans only last for up to 5 years and then they will revert to Principal and Interest.

Principle & Interest

This loan is structured so that you are paying off the interest and the principal from the get-go. Therefore, reducing the amount of interest charged over the life of the loan as the principal is gradually being reduced. At the start of the loan only a small part of the principal is being repaid. As the loan goes on, a larger amount is allocated to repaying the principal.

Why would you go Interest Only?

In short if money is tight or you want to move the property on in a short period if you believe that you will have a strong capital gain. The minimum repayments will be lower allowing you to free up the extra income for other purposes. This can increase your cash flow in the property and allow you to purchase additional investment properties as opposed to paying down the principal.

Why would you go Principle and Interest?

If you want to pay down your loan and be mortgage free then Principal and Interest is the way to go. If you want to pay off the loan even faster, you can allocate additional funds to the loan to speed up the process. Just remember minimum repayments will be higher than if you opted for an interest only loan as you are paying off the principal from day one.

So what do I choose?

In the end everyone has different goals they are trying to achieve. Strike is able to assess these with you and come with an optimal strategy to enable your property to transition at the right times. It is important to remember that property investing is a game of finance so having a team of professionals behind you from the start is important.

As the name suggests, an interest only structure on your home loan means when you make your repayments each month you are only paying the interest charged. This means you aren’t paying down any of the money you owe (the principal) during this period. Interest only loans generally only last for 5 years, after which time they will revert to Principal and Interest.

Over recent months the Australian government have made legislative changes to encourage people to pay off their debts. This means many banks are charging higher interest rates on interest only loans, this is for both owner occupied and investment loans. 

This practice is a way of influencing how the government wants the economy to transpire. having this in mind, it is important to ensure that you reach out to Strike Property to ensure that your personal circumstances are being meet with the correct loan structure.

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