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We know you’ve heard it all before. With interest rates tumbling since October 2011, and the cash rate now sitting at an all time low 2.5%, we’re fairly certain you would have done your homework by now on which lenders are offering the lowest interest rates, and possibly taken the plunge to buy your first home. But have you looked very far into the best type of loan repayment option for you?
If you’d like to free up a little cash, or are finding that your mortgage repayments are becoming too much of a burden, it may be time to look closely at your repayment options. Most people know that there are two types of repayments; principal and interest, or interest only. However, it seems some people aren’t aware of which repayment type will best suit them or just what the benefits of each could be.
Principal & Interest Repayments:
The principal portion of your loan is the money you originally borrowed, while the interest is the money you pay to keep the loan ticking along. Be wary that some lenders may push for you to take out a principal and interest loan, as this is the most beneficial to them; however, it’s important that you understand you options – particularly if your bank balance isn’t exactly enviable. The fact is, if you take out a principal and interest loan you’re then obligated to start paying down the loan from the first repayment.
By taking on a principal and interest loan you will immediately begin paying down your loan, and will see your loan account balance reducing every month.
If you’re only paying the minimum repayments each month you won’t be able to redraw any of those principal repayments made.
Interest Only Repayments:
As you may have guessed, an interest only loan means you only pay the interest on the loan balance.
Interest only loans will put you out of pocket less each month, so they’ll benefit anybody hoping to free up a little extra cash or reduce their monthly repayment obligations. Investment interest only loans have tax-deductible interest, ensuring investors gain maximum tax benefits.
Theoretically, a loan that remains ‘interest only’ will never actually be paid off unless you decide to make additional repayments or sell the property. This has traditionally been the biggest turn-off for people, as most want to see their debt reducing as quickly as possible. But it’s worthwhile remembering that you will in fact be able to pay off the mortgage by paying more than what is required. Paying larger than the minimum amount will also leave you with a sum that can later be withdrawn (providing you have a redraw facility attached to your loan), to be invested elsewhere, such as a deposit for another property.
Our team at Professionals Paradise Realty urge anybody in need of a greater cash flow to look into your finances and discuss your repayment options with an expert. You may find that you’re currently in the best position possible for your situation, but you also may find a way to free up extra money each month that you hadn’t expected.