🎀12 Days of B&W Finance - Day 10🎀
When you think of Christmas, do you think about a snowy winter wonderland or a sunny Aussie day having a barbie with the family after opening all your presents? Two stark contrasts when you consider the different experiences we have around the world.
You won’t have to circle the globe like Santa on Christmas Eve to find out the differences between interest only and P&I repayments on your home loans.
Today on day 10 of our 12 days of Black and White Finance, we’ll be going through the pros and cons of each and letting you know how you can minimise your debt sooner.
"On the tenth day of Christmas, Black and White Finance gave to me: Ten repayment tips,
- Nine ways to save,
- Eight specialist loans,
- Seven tips for auction,
- Six low deposits,
- Five lenders lending,
- Four guarantors,
- Three construction loans,
- Two different rate options,
- And a head start on my first home"
Interest Only, Please
Let’s begin by explaining interest-only loans, they are essentially shorter parts of the overall loan where the borrower only pays the interest – hence the name!
After the interest-only period is over, the borrower then goes on to pay the principal of the loan and the repayments change.
Interest-only loans allow you a few key benefits to your loan and provide you added flexibility with repayment options, some of these include;
Having the option to purchase the furniture/amenities needed in your home with the funds you save by paying interest only.
Covering any temporary shortfalls you may have i.e. having a baby or changing to part-time employment.
Interest-only repayments can be really good for investment properties within the period of you looking for tenants, it also allows you to maximise your interest charge and therefore, the eligible deduction against your rental income for that investment property.
Interest-only repayments also allow you to put any surplus funds into other investment opportunities.
However, given the nature of interest only, you may very well end up paying more money in interest in the long run and as such need to consider if paying a reduced amount in the beginning outweighs the extra repayments in the end.
P&I At Your Service!
Principal and Interest (P&I for short) are loan repayment types that allow the borrower to pay the principal part of the debt – that is the actual amount borrowed, in conjunction with any interest accrued.
Advantages of paying P&I repayments include;
Paying P&I will help you build equity sooner as you will be directly reducing the debt you owe.
The interest you pay will be greatly reduced because any interest is calculated on the debt you owe – as that reduces so too does your interest!
One thing to note, however, is that due to paying both principal and interest at the same time, repayments will typically be higher than if you were only paying the interest. This can sometimes be detrimental to borrowers with restricted cash flow and may not be suited for everyone.
Opposites Attract, But Which Attracts You?
There are actually plenty of different interest only and P&I calculators on the web you can try for yourself and they can often give you clarity on your long-term financial goals to see which works better for you.
Interest-only loans are great for people who want to manage their funds a little more strictly. Often borrowers who have restricted cash flow will opt for this however it can also benefit those wishing to purchase multiple properties or do some construction work on existing property and need some extra cash to be leftover.
Conversely, making P&I repayments will allow greater control of your money in the long run as borrowers will be constantly making smaller interest repayments as the loan goes down.
This type of loan is ideal for families who want to minimise their debt as soon as possible and is a popular choice among first home buyers.
Final Thoughts
Day/Night, Summer/Winter, Black/White, Interest Only/P&I.
Our everyday world is full of amazing contrasts and the financial world is no different.
Whether you want to consolidate all your debt into one or split and pay your interest separately, you should definitely conduct your own independent research to find what is best for you and seek professional help from a broker.
Just as all our contrasting examples, no two people are the same and your specific situation may call for some out of the box thinking which brokers such as us are known for.
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