It’s important to understand how different types of loan repayments work and how they can change over time. Here’s what you need to know about the two most common types of loan repayments – principal and interest and interest only.
The two parts of every home loan:
Principal - the amount you borrow
Interest - the amount you're charged by the lender for borrowing the principal amount.
This is when you pay both parts of your loan – the principal as well as the interest charged on it.
This is when you only pay the interest portion of your loan for a set period of time, for example the first five years of your loan. As you’re not making payments on the ‘principal’, this will remain the same, unless you nominate to make additional repayments.
At the end of your interest only period, you’ll need to start paying off the principal at the current interest rate at that time.
While interest only repayments are lower during the interest only period, you’ll end up paying more interest over the life of the loan.
See how the two types of loans affect John and Rebecca's repayments.
John and Rebecca have a loan of $500,000 and are deciding which repayment option is suitable for them:
| Principal and interest for life of loan | Interest only for first five years | |
|---|---|---|
| Interest rate | Principal and interest for life of loan 4.39% | Interest only for first five years 4.39%1 |
| Loan term | Principal and interest for life of loan 30 years | Interest only for first five years 30 years |
| Monthly repayments during interest only period | Principal and interest for life of loan n/a | Interest only for first five years $1,829 |
| Monthly principal and interest repayments | Principal and interest for life of loan $2,501 | Interest only for first five years $2,7482 |
| Total interest payable | Principal and interest for life of loan $400,307 | Interest only for first five years $434,161 |
| Additional interest paid due to the interest only period | Principal and interest for life of loan $0 | Interest only for first five years $33,854 |
1 Rate used in example is a variable rate which may change. We have used the same interest rate for both repayment types to easily illustrate the additional interest payable due to the five-year interest only period. Please note, interest only rates are normally higher than principal and interest rates for an equivalent home lending product.
2 Principal and interest repayments based on remaining loan term of 25 years.
We've created a handy home loan repayments calculator to help you calculate and compare your loan repayments. you can change between principal and interest repayments and interest only repayments to estimate the different.
If you already have a NAB interest only home loan which is about to expire and want to talk about your options, call us on 13 22 65 today.
Important information
The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.
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