Which loan is best for you
Imagine looking at your statement and seeing you're only one payment away from owning your home. This may feel like a dream but there are actions you can take to make it a reality.
There are many options available to us and understanding how these can affect your long term goal is a great start.
Buying a home can be complex, and it's even more difficult when choosing from the vast array of home loans on the market. Options such as variable rate loans vs fixed rate loans and principal & interest vs interest only can be bewildering.
Let's delve into two of the most popular home loans: principal and interest and interest only and see how this could help you shrink your home loan.
Principal and interest
What is a principal and interest home loan?
As the name suggests, your loan repayments go towards paying both the principal (the amount you borrow) and the interest (which is calculated over the term of the loan).
Why take out a principal and interest loan?
As you are paying off both the principal and the interest, you’ll be paying more than you would for an interest-only loan. However, you’ll own your home sooner than you would if you simply paid off the interest as you are also repaying the principal.
Owner-occupiers (people buying a house to live in)4 often prefer this type of loan.
What is an interest only home loan?
With an interest only loan, you will only pay interest for an agreed time, such as five years.5 Then your loan will revert to a principal and intetest loan over a longer period of time, such as 25 years.
Why take out an interest only loan?
The main benefit is that you will pay less day to day during the interest only period, but you won't pay any principal off the amount you owe on your home loan, this could affect your ability to achieve your long term financial goals, such as owning your home sooner.
Are there any risks to consider?
Interest only loans can be risky because you are not paying off the principal amount of the loan during the interest only period.
So, if the value of the property falls, you could end up owing more than the property is worth, if the outstanding loan amount is more than the value of the property.
Paying off the principal over a shorter length of time after the interest only period ends means your monthly repayments will be larger. So it's a good idea to make sure you can afford the higher repayments. See if this option may suit you with our RapidPay calculator.
Let's look at a case study
Kate and Sam want a $500,000 home loan for their new home. They are comparing the difference between an interest only loan and a principal and interest loan at 4.09% rate.
See how this works using our RapidPay calculator
Assumptions: The interest rate of 4.05% pa remains the same over the 30-year loan period. Interest rates are subject to change and may increase during the life of the loan. No fees or charges have been considered.
Professional Package Effective 27 March 2020
Owner Occupied variable rate loans from $750,000*+ LVR ≤ 90% + LMI, & P&I repayments. Other rates apply for Investment property loans.
The Professional Package Loan
The AMP Bank Professional Package helps you create a home loan that's easy to manage.
An AMP Bank Professional Package is a flexible home loan of $100,000 or more. You can combine reatures and banking products to create a home loan with access to your funds and extra repayment ability.
Owner occupied principal and interest variable rate loans from $750,0001,3.
Other rates apply for Interest Only and Investment property loans.
It’s important to consider your particular circumstances and read the relevant Product Disclosure Statement or Terms and Conditions before deciding what’s right for you. This information hasn’t taken your circumstances into account.
This information is provided by AMP Bank Limited ABN 84 079 300 379 (AMP Life). Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice.
The credit provider and product issuer is AMP Bank Limited ABN 15 081 596 009, AFSL 234517 and Australian Credit Licence 234517.
1 *Information including interest rates is correct as at 27 March 2020 and is subject to change without notice. Terms and conditions apply and are available at amp.com.au/bankterms or 13 30 30. Fees and charges are payable.
2 **Comparison rate calculated for a secured loan on a loan amount of $150,000 for a 25-year term. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
3 Rate is for new loans only.