What are the Pros and Cons of Interest Only and Principal & Interest Home Loans?
Interest-Only home loans (IO) and Principal and Interest home loans (P&I) are two common types of mortgage repayment options. Both have their own set of advantages and disadvantages, and the right choice for you will depend on your financial situation and goals. Here is a summary of the pros and cons of each type of mortgage repayment:
Interest-Only Home Loans:
- Lower monthly payments: With an Interest-Only home loan, you only pay the interest on the loan for a set period of time (usually 1-5 years). This means your monthly payments will be lower compared to a Principal & Interest home loan, where you pay off both the principal and the interest.
- Potential tax benefits: Depending on your tax situation, the interest payments on an Interest-Only home loan may be tax deductible for investment loans.
- Higher total interest costs: While your monthly payments will be lower with an Interest-Only home loan, you will ultimately pay more in interest over the life of the loan compared to a Principle & Interest home loan. This is because you are not making any progress towards paying off the principal.
- Risk of payment shock: When the Interest-Only period ends, your monthly payments will increase as you start repaying the principal as well. This can be a financial strain if you are not prepared for the increase.
Principal & Interest Home Loans:
- Lower total interest costs: With a Principle & Interest home loan, you pay off both the principal and the interest over the life of the loan. This means your total interest costs will be lower compared to an Interest-Only home loan and you will own your property outright sooner.
- Equity build-up: As you make payments towards the principal, you will build equity in your property. This can be helpful if you need to borrow against your equity for home improvements or other expenses.
- Higher monthly payments: Because you are paying off both the principal and the interest, your monthly payments will be higher compared to an Interest-Only home loan.
- Not Tax-Efficient: With a Principle & Interest home loan, it might not be tax-efficient as an Interest Only loan for investment loans, depending on your tax situation.
Ultimately, the right choice for you will depend on your financial situation and goals. If you have a stable income and are able to afford higher monthly payments, a Principle & Interest home loan may be a better choice in the long run due to lower total interest costs. If you have a more unstable income or are seeking lower monthly payments in the short term, an Interest-Only home loan may be a good option. It is important to carefully consider your options and consult with a financial advisor before making a decision.
Still confused whether you should choose an Interest-Only Home Loan or a Principal & Interest Loan? Get in touch with your friendly Hero Finance broker to discuss your situation and what strategy would work best for you.