During the home loan comparison process, you might come across two different types of loan repayment options. One is an interest-only loan and the other is a principal-and-interest home loan. It is important to understand the differences between these two options carefully. Here’s a brief look at the options:
Interest-Only Home Loans
Interest-only home loans have fixed period inthe beginning when all the mortgage amount you pay goes towards your interest obligation. There will be no principal amount deducted until the interest-only period is done.
This interest-only period usually lasts for 5 years, after which the loan switches to principal-and-interest home loan. This loan option does offer some benefits that you must consider during home loan comparison. These benefits include:
- Lower Repayments – You will have lower repayments every month during the interest-only period. This can help people who are on a tight budget and ease the financial strain caused by repayments.
- Tax Deductions –Interest-only loans lead to higher tax deductions and lower tax payable. This option is desirable to an investor.
- Short-Term Lending – This type of loan is ideal for short-term or transitional requirements. You can choose this option for construction or bridging loan without having to pay more.
The interest rates are higher under this option and borrowers often end up spending more money in the long-run. You won’t build any equity during this period and might have more repayments at the end.
Principal-and-Interest Home Loans
This is the most popular option available and is suitable for most home buyers. Under this option, one portion of your repayment goes towards reducing principal and the other towards interest. This option offers a number of advantages, including:
- Shorter Loan Term – You will be able to reduce the number of repayments because you start chipping away at the principal amount from the very beginning.
- Lower Interest Rates –This loan has lower interest rates and the amount you pay will keep decreasing as your principal amount decreases. This means you pay less and less as the loan term progresses.
However, the initial repayments are higher and you won’t be able to enjoy as many tax savings over the long run.It is important to fully understand the terms of these loans before making a decision.
Research the two options thoroughly before conducting a home loan comparison. That will allow you to make the best decision based on your requirements. If you want to know more, don’t hesitate to contact us at Home Loan Comparison on 0419 856 669.