Loan Repayments: The Basics
Don’t you wish a loan came in an IKEA flatpack with an easy-to-read instruction manual? Wish you could put it together as if it were a set of drawers – clean, understandable, accessible? With all the various loan types, packages and repayment options, a manual would make the process a whole lot simpler, wouldn’t it.
But never fear, that’s why we’re here to simplify the process. At Select, we are the instruction manual. And we can help you understand the basics of what you need to know when choosing a repayment option.
While each bank may have their own repayment methods depending on the packages they offer, we have listed the two basic options that extend across all lenders: ‘principal and interest’ (P&I) instalments and ‘interest-only’ instalments.
‘Principal and interest’ (P&I) instalments are the most common variety of loan repayments in Australia. They reduce the principal amount as well as the amount of additional mortgage interest you’ll pay over the life of the loan. While you’ll make higher repayments, it’s a smart choice for home buyers who intend to stay in the property long-term. By paying off the capital and interest at the same time, you can easily increase your equity stake in the home, reduce additional interest payments and speed up the road to home ownership.
On the other hand, ‘interest-only’ instalments are typically aimed at investors. With these repayments, you will only need to pay the interest set by the lender. This means selling the property will often repay the principal amount. These types of repayments enable investors to receive a rental income and, over the life of the loan, generate capital gains.
Role of the interest rate
Forbes defines the interest rate as one of the most important aspects of the economy, which “influence the cost of borrowing, the return on savings and… the total return on many investments.”
When taking out a loan and making repayments, you can choose between paying a fixed interest rate or a variable interest rate.
With a fixed interest rate, your repayments won’t change over the length of time the rate is set. Since you have ‘locked in’ an interest rate, you will have peace of mind and a stable repayment amount.
However, with a variable interest rate, your repayments will fluctuate as the rate changes over time. While your loan term will remain the same, your repayment amount can increase or lessen across the life of the loan.
In saying this, there are hundreds of packages on the market with various repayment methods and rate options. This is why talking to your local mortgage broker is essential when finding the package that suits your circumstances.
At Select, we offer no-obligation, quality and free advice to help you reach your financial goals. For more information, call us on (08) 9417 3399 to organise an appointment with one of our brokers and discuss your options.