Is it better to pay my home loan’s principal and interest or interest only?

Answer

Whether you decide to pay the principal and interest or just the interest on your home loan will depend on your personal objectives and financial situation.

What are principal and interest?

A home loan has two parts:

The principal

The amount you borrow to buy a property.

The interest

What you’re charged by the lender for borrowing the principal.

Which repayment option is right for me?

If your aim is to repay your home loan in full over time, then making repayments that cover both the principal and the interest will mean that ultimately, you’ll end up owning your home, mortgage-free.

Investors may choose to pay the interest only―and not the principal―because the interest on an investment loan is tax deductible.

However, paying the interest only has several risks and downsides. As the principal will not reduce at all, you’ll pay more interest over the life of the loan. And, despite making your monthly repayments, if the property’s value doesn’t increase during the life of the loan, you won’t have built any equity increasing the risk that you’ll lose money should you have to sell the property.

Need more help?

When you’re looking for a loan, ask your lender or a financial adviser to show you the difference paying each way can make over time, or use our rapid pay calculator to find out.

For more help, visit our understanding home loans page or check out our range of home loans.

 

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Important information

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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 is general in nature hasn’t taken your circumstances into account.
This information is provided by AMP Bank Limited. 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.

Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

The credit provider and product issuer is AMP Bank Limited, AFSL 234517 and Australian Credit Licence 234517.