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Home Loan Repayment Types

When it comes to choosing a home loan, one of the options that you’ll need to weigh up is whether to request principal and interest repayments or interest only repayments.

 

What are principal and interest repayments?
When you pay principal and interest repayments, each repayment goes towards paying off both the amount borrowed to buy the property (the ‘principal’) as well as covering the interest. By the end of the loan term (which can be up to 30 years), both the amount borrowed and the total amount of interest owed will be repaid.

 

What are the benefits of principal and interest repayments?
Loans with principal and interest repayments have a lower interest rate. Given that a home loan term can be up to 30 years, the amount you could save in interest could be significant.
Another benefit of principal and interest repayments is that with every repayment, you owe a little bit less of the amount you borrowed and are a step closer to owning your home outright.

 

Other advantages include:  

  • A lower interest rate when compared to interest only repayments

  • You’ll own your home sooner

  • You will pay less interest over the life of the loan

  • You may be able to borrow more


What are interest only repayments?

When you pay principal and interest repayments, each repayment goes towards paying off both the amount borrowed to buy the property (the ‘principal’) as well as covering the interest. By the end of the loan term (which can be up to 30 years), both the amount borrowed and the total amount of interest owed will be repaid.

 

What are the benefits of interest only repayments?
The repayments may be temporarily lower at the start of the loan.
If your loan is for an investment property, there may also be potential tax benefits.


Some other considerations for interest only repayments


It’s important to weigh up the following factors when requesting to pay interest only:

  •  Interest rates for loans with interest only repayments are higher – it’s important to be aware that the interest rate will be higher if you pay interest only instead of principal and interest.

  • Increased repayments at the end of the interest only period – because the amount you’ve borrowed will need to be paid back in a shorter timeframe, the repayments will be higher than if you’d opted to pay principal and interest from the outset. The longer the interest only period, the higher the jump in repayments will be.

  • You’ll pay more interest over the life of the loan – that’s because there won’t be any reduction in the amount you’ve borrowed during the interest only period.

  • You won’t be building equity in your home as fast during the interest only period (equity is the value of your home less the amount you owe on it.)
     

It’s important to understand the loan repayment option you are planning to request and how this impacts you. Keep in mind the above considerations when requesting interest only repayments. It’s important to ask yourself first if you’ll be able to afford the higher repayments when the interest only period ends and if the short-term benefits of lower repayments will outweigh any long-term costs.
 

Things you should know

This information has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information, having regard to your objectives, financial situation and needs and, if necessary, seek appropriate professional advice.  The taxation position described is a general statement and should only be used as a guide.  It does not constitute tax advice and is based on current tax laws and their interpretation

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