Tell a friendDefinition
Principle and interest (sometimes called P&I), like interest only, is not so much a mortgage type, but a repayment option. Principle and Interest is the most cost effective repayment option unless you are financially disciplined and will make regular, extra repayments, or have a specific investment strategy that requires interest only. A principle and interest repayment creates slightly higher repayment commitments, but significantly reduces your overall interest costs. When you borrow money, there are three parts to the repayment of that loan::
- Principle (the money that you originally borrowed)
- Interest
- Fees and Charges (most lenders bill these charges separate to each repayment)
If you have not established your repayments on a principle and interest basis, you are not actually repaying your loan unless you make extra, manual payments.
Principle and Interest Terms (duration)
Principle and interest loan terms are standard, ranging from 5 years up to 40 years.
Advantages
The key advantage is that principle and interest repayments force you to repay your loan and this will lower your overall interest cost. Extra repayments and offset facilities will work more effectively for a principle and interest loan.
Disadvantages
The main disadvantage of a principle and interest repayment structure is your repayments are slightly higher than taking an interest only option.
Beware of
Colourful characters who try to convince you to take interest only because it costs you less. It is true principle and interest has slightly higher repayments, but you pay far less interest as you are actually paying your loan off.
Pricing
Pricing is standard, there is no extra loading for principle and interest mortgages.
Popularity
In Australia interest only mortgages are generally less popular than principle and interest mortgages.
