How different loan types can affect home loan repayments

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.

Principal and interest repayments

This is when you pay both parts of your loan – the principal as well as the interest charged on it.

Advantages of a principal and interest loan:

  • Pay less interest over the life of the loan
  • Pay a lower interest rate compared to interest only rates for an equivalent home lending product
  • Pay off your loan faster, so you'll own your property outright sooner

Disadvantages of a principal and interest loan:

  • Repayments are higher than interest only
  • May not be as tax-efficient for investment loans

Interest only repayments

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.

Advantages of interest only loans:

  • Lower mortgage repayments for a limited time to suit your lifestyle (a common need for lower repayments can be one person taking time off work to be a primary carer)
  • Possible tax benefits for investment loans

Disadvantages of interest only loans:

  • Principal amount will not reduce during interest only period
  • Higher repayments once the interest only period finishes
  • Higher interest rate during interest only period
  • More interest payable over the life of the loan

Interest only vs. principal and interest case study

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:

Mortgage repayment case study
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.

Calculate and compare property loan repayments

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.

Changing from interest only to principal and interest

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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