Which Mortgage Is Right For You? Interest Only vs Principal & Interest Loans | Pros & Cons Explained

Which is better? Having an Interest Only Mortgage or paying off a Principal and Interest Home Loan? When choosing the right loan for you, a good place to start is deciding between an Interest only vs Principal and Interest Home Loan. But what exactly are they, and what's the difference? In this video, we look at the pros and cons of each kind of mortgage and how to choose which would be better for you in 2022.
Of course, a good place to start is deciphering each kind of loan entails. A Principal and Interest Home Loan is when there's a component of your repayments that go towards paying down the principal balance of the loan (the amount you borrowed) and a component that goes towards interest (the cost of borrowing).
Contrastingly, an Interest Only Home Loan means you only repay the monthly interest on the amount borrowed for a set term (usually no more than five years). During this time, no repayments are required to reduce the principal amount borrowed, which means the loan balance doesn't reduce.
So, the real question arises: Should you be paying down your loans, or is it okay to go Interest Only for cash flow? I break down these exact two scenarios with real-life examples and try to ascertain the benefits and disadvantages of each type of loan. Let's jump in.
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Please see below a breakdown of the content covered in today's video:
00:00 Which Mortgage Is Right For You? Interest Only vs Principal and Interest Loans
00:15 What's the difference between an Interest Only Vs Principal and Internet Home Loan?
01:03 Advantages of Interest Only Loan
01:05 1. Interest Only Loans Turn Existing properties Into Investments
01:27 2. Temporary Falls In Income Are Covered With Interest Only Loans
02:06 3. Impacts on Construction & Renovation
02:33 Cons of Interest Only Loan. Why banks have limited these home loans.
02:36 1. Interest Rates Are Far Higher on Interest Only Loans
03:02 2. Banks Have Cracked Down On Interest Only Loans
03:18 Benefits of Principal and Interest Loans
03:20 1. You Are Paying Off Your Debt!
03:35 2. You Can Get Higher Leverage On Property (all the way up to 95%!)
05:36 3. No Repayment Shock with P&I Home Loans
06:09 Principal & Interest Home Loan - A Real Life Example
07:43 Home Loan Calculator - Breaking Down Interest Rates & Repayments
08:28 When it makes sense to do Principal and Interest Home Loans
09:08 Our Final Thoughts - Interest Only Vs Principal and Internet Home Loan
If you'd like to know the 8 Types of Home Loans and which is best for you, view the below video - • 8 Types of Home Loans ...
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[@JamystroV2]

probably worthwile to mention the main pro of interest only is inflation, ie. pay your principal in the future with the same volume of money with less value

[@MortgageBrokerAustralia]

Great point, thanks for sharing Jamy!

[@spudzphone2617]

What about the use of offset accounts on interest only loans. We bought a ppor and used this strategy. It allowed us to save more cash reserves (for a future purchase), lower our repayments and we then bought another property as a ppor. That allowed us to maintain a larger debt for negative gearing purposes. We won't choose p&i until we are done with our target of 3 total properties and then pay down our ppor. Offsets and interest only is great, if you can save that extra cash.

[@MortgageBrokerAustralia]

Thanks for sharing Spudz!

[@oldskoolfunk71]

Thank you for this great information. What is the mortgage calculator you are using?

[@MortgageBrokerAustralia]

Thanks for watching, feel free to play around with the calculator here: www.infochoice.com.au/calculators/home-loan-calculator/

[@ThatOneYouHate]

Interesting. Thanks for useful content 👍

[@MortgageBrokerAustralia]

My pleasure!

[@peemun4545]

Question: I am about to go to the market for my first home, but was wondering with 100k deposit, can you purchase a multiple homes (one for living and the rest for investment) with one home loan? If yes, how can be done, knowing that purchasing investment property requires 20% deposit and purchasing a home to live in requires 5% to 20%? Can you please assist?

[@MortgageBrokerAustralia]

Thanks Peemun, each purchase would be set up separately. Effectively you'd be able to lend up to 95% on the home to live in and the investments up to 90%

[@jacqepapara7898]

Wow great info guys thanks👍😊

[@MortgageBrokerAustralia]

Thanks for watching

[@nicholaliu5845]

I do principle and interest it work’s for me

[@MortgageBrokerAustralia]

Thanks for sharing Nichola!

[@bassmovementhq3742]

Is it true that with some lenders, having your loan on interest only may actually improve serviceability as they take your exact repayment amount that your making on the loan. I am pretty sure that some third-tier lenders do this when assessing serviceability.

[@MortgageBrokerAustralia]

Thanks Bass Movement, that's right.