Real estate investors will be familiar with the debate about whether to choose a ‘principal and interest’ (P&I) or ‘interest only’ repayment when signing up for an investment mortgage. Ultimately, the choice depends on your personal circumstances and preferences.
However, if you are new to property investing and are still weighing up the merits of a P&I or ‘interest only’ loan, it helps to understand how these repayment options work.
To start with, principal and interest repayments work by reducing the initial loan amount (principal), as well as the interest. Typically, this approach is favoured by investors who plan to own the property outright, or wish to build equity in the property. However, those who opt for this form of repayment need to consider the impact on negative gearing tax benefits – as your loan amount decreases, so too will the amount of interest you can claim on tax.
On the flipside, interest only repayments cover only the interest charged on your home loan, and this means repayments are lower than a standard principal and interest loan.
Interest-only repayments are popular with investors who plan to sell their property in the short-term for profit. That said, it is important to find out when the loan’s interest-only period ends, as lenders will generally require you to pay down the principal at this time.
Armed with this information and your personal situation in mind, the next step is to select a home loan. Online lender loans.com.au is currently offering variable (principal and interest) investment loans starting at 6.58 percent – with monthly repayments of $2041 on a $300,000 loan.
If interest only is your preferred option, AMP is offering a three-year fixed term at 6.39 percent, and on a loan of $300,000, the interest-only repayment adds up to $1598 per month for the first three years. However, this figure may revert to a higher standard variable rate after the fixed term is up.
These examples illustrate the variety of investment loans available and the costs associated each repayment option, but as always, speak to your lender about all the terms and conditions before you commit.