The difference between Interest only and Principal and Interest loans is simple. When you are paying Interest only then you are simply repaying each month the amount of interest that was charged the month prior. Principle and Interest is when you are repaying the interest amount as well as some of the principle loan so you will see your loan balance slowly decrease.
So what repayment should you be on? That completely depends on what your plans are.
A lot of Investment properties are Interest only and this is so the ‘taxable debit’ can be as large as possible whilst people repay their personal debit. Another time you will pay interest only on your loan is if you are building, during the ‘progress payments draw down’ you are charged Interest only.
There are other times you may switch your loan to Interest only and these may be;
· You’re experiencing a lower pay for a short period, for example maternity leave or redundancy
· You have purchased a new property without selling the existing property yet
· You plan to live in the property for a short period and it will then become an investment property
· You are completing work on the property and want to keep additional cash available to complete the repairs.
Whilst there are many reasons you may go to interest only payments it is important to understand what this means to your 30-year contract.
· You will need to increase your repayments later to ensure the debit is repaid within the 30 years
· Equity in your property increases slowly because you are not paying down the debit
· You may receive a higher interest rate whilst you are on interest only payments
· You can only make monthly payments rather than weekly and fortnightly
To find out more about interest only payments email me at maryanne@360mortgagesolutions.com.au