What are principal and interest repayments?

When it comes to paying off your home loan, you have the choice between principal and interest (P&I) or interest-only repayments.

Most homeowners choose principal plus interest payments – in other words P&I. This is where each repayment is made up of interest plus a small portion of the loan balance (or principal). In this way, the loan is steadily paid off over time.

By paying P&I, you repay the mortgage earlier in the term, but you also end up paying less in interest. For example, if you’re a homeowner with a $400,000 loan with an interest rate of 5.22% p.a., over 30 years, it will cost about $29,000 more in interest if you choose to pay interest only for the first five years of the term.

To estimate how making P&I repayments can save you time and slash how much additional interest you’ll pay, use our home loan repayments calculator.

On the other hand, interest-only payments will be lower because they are comprised of interest charges only. You do not repay any of the loan balance at all. Therefore interest-only loans are usually best suited to investors, while you'll usually need to sell the property to pay off the loan. This strategy might work well for some investors but is not what most owner-occupiers have in mind when buying a home.

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Important note: This information is of a general nature and is not intended to be relied on by you as advice in any particular matter. You should contact us at Defence Bank to discuss how this information may apply to your circumstances.

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