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Ask An Expert: P&I or Interest Only?

Tuesday, February 05, 2013

Paula asks the APIA Expert Panel:

Why do some people choose loan repayments at principal and interest or interest only?  How do they decide which is better for that property?

Lena Li, ANZ Mobile Mortgage Manager, Answers 

Paula, when you take out a Home Loan, you have two repayment choices: principal and interest (table) or interest only.

Principal and Interest (Table)

Table repayments which is also the most common option and are more stable than other payment options.

The total amount of interest that must be paid over the duration of the loan is added to the principal, and then divided into equal repayments over the term of the loan.

With table repayments:
  • you will know what your repayments will be so budgeting becomes easier
  • the proportion of principal and interest in each of your repayments changes over time. Early on, you are paying more interest than principal. So if you sell your home within a year or two, the principal may not have substantially reduced
  • as the principal is reduced over time you will gradually increase the equity in your home
  • you can choose weekly, fortnightly or monthly payments
  • you can choose table repayments on Fixed Rate or Floating Rate Home Loans.

Interest only

On an interest only loan you only pay the interest with each repayment and must repay the principal, or amount borrowed, at the end of the loan term.

With interest only repayments:
  • because you are not paying off principal over the term of the loan, interest only home loans are most suitable if you are expecting some capital gain to help you pay off the principal at the end of the interest only term - from a sale of your investment property, for example
  • you can choose a one to ten year term
  • you pay back your interest only loan on a monthly basis
  • you can choose interest only repayments on Fixed Rate or Floating Rate Home Loans
  • interest only repayments are often popular with people buying residential rental properties.
I hope this helps.  If you are interested in knowing more, please contact any of our Mobile Mortgage Managers in your local area and discuss further details on a one on one basis.   

David Whitburn, APIA President, Answers

Some people choose principal and interest (P&I) on their loans as they wish to reduce their debt faster, meaning they have less interest costs to pay, and their loan paid off faster.  A lot of people do this on their own home loan.

Some investors like P&I loans as the debt has to be repaid sometime, and this also gets their interest costs down.  Many older investors do this. Interest only loans are common with property investors who wish to have their loans maintained with the minimum outgoings to service them, whilst they reduce their loan on their own home - which is not tax deductible.

Interest costs on investment property loans are fully tax deductible.  Principal repayments are a capital item and are not tax deductible.  Seek expert chartered accounting advice from a specialist property investment accountant if you have any doubts.

Wishing you all the best with your investments and APIA membership!

The APIA Property Expert Panel is ready to answer your property questions.  Please email them through to elves@apia.org.nz and we will get you an answer pronto!

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