Choosing between interest only and principal & interest repayments
When you’re taking out a home loan, one of the first decisions you’ll face is whether to go with Interest Only repayments or Principal and Interest (P&I) repayments. Understanding the difference between the two is key to managing your cash flow and shaping your long-term financial outcomes.
What are interest only repayments?
With Interest Only repayments, you’re only paying the interest charged on your loan, not the loan amount itself (known as the principal). This option is usually available for a limited time, often up to 5 years.
During this period, your repayments are lower, which can help with short-term affordability or free up cash for other investments. But once the interest-only period ends, your repayments will jump significantly as you start paying off the principal.
It’s important to note that your loan balance doesn’t reduce during the interest-only phase, so you’ll end up paying more interest over the life of the loan.
What are principal and interest repayments?
Principal and Interest repayments mean you’re paying off both the interest and a portion of the loan amount each month. This reduces your loan balance over time and helps you build equity in your property.
While monthly repayments are higher compared to interest-only, this option can save you a lot in interest over the life of the loan and help you own your home sooner.
Which option is right for you?
Choosing between Interest Only and Principal & Interest depends on your financial goals.
- Interest Only might suit property investors who want to maximise cash flow or borrowers expecting a future income boost.
- Principal & Interest is generally better for owner-occupiers who want to reduce their debt and interest costs over time.
If you’re unsure which option fits your situation, our mortgage brokers at Acceptance Finance in Melbourne are here to help. We’ll walk you through the pros and cons based on your goals and financial position.
Try our repayment comparison calculator
To make things easier, we’ve built a simple calculator that shows how each repayment type affects your total repayments and loan balance over time. It’s a great way to visualise the long-term impact of your choice.
Want to chat about your options? Reach out to our
friendly team at
Acceptance Finance and we’ll help you make the right move for your future.
