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When you take out a home loan, you can choose to pay back both the interest and loan principal, or the interest only.
It's important to understand how these different home loan repayment options work before taking out a mortgage.
The loan principal is the amount of money you borrow. Interest is the cost you pay the lender to take out a loan. The sum of interest you pay depends on the principal and loan term, interest rates and other details.
With a principal and interest loan, your regular repayments are applied to both the loan's principal and interest.
When you start making repayments, most of your money will go towards the loan's interest. After a while, more of your monthly repayment will go towards the principal instead of interest. As you gradually pay the principal portion, the interest on that principal amount will also go down.
Advantages
Disadvantages
For a set period, your repayments only go towards the interest on your loan, and not the loan principal amount. This can be up to 3 years for an owner-occupied loan and up to 5 years for an investment loan.
You'll need a credit assessment to apply for an interest only loan.
Advantages
Disadvantages
The type of loan you take out will affect your repayments. See how much interest you'd pay on the same loan over 30 years.
Although interest only loans usually have a higher interest rate, we're using the same rate for comparison purposes:
| Loan terms | Principal and interest | Interest only (3 years) |
|---|---|---|
| Loan amount | $600,000 | $600,000 |
| Interest rate | 6.0% | 6.0% |
| Repayments - interest only period | Not applicable | $3,000 |
| Repayments - principal and interest | $3,598 | $3,741 |
| Total interest payable | $695,030 | $719,815 |
| Loan terms | Loan amount | Loan amount |
|---|---|---|
| Principal and interest | $600,000 | $600,000 |
| Interest only (3 years) | $600,000 | $600,000 |
| Loan terms | Interest rate | Interest rate |
| Principal and interest | 6.0% | 6.0% |
| Interest only (3 years) | 6.0% | 6.0% |
| Loan terms | Repayments - interest only period | Repayments - interest only period |
| Principal and interest | Not applicable | Not applicable |
| Interest only (3 years) | $3,000 | $3,000 |
| Loan terms | Repayments - principal and interest | Repayments - principal and interest |
| Principal and interest | $3,598 | $3,598 |
| Interest only (3 years) | $3,741 | $3,741 |
| Loan terms | Total interest payable | Total interest payable |
| Principal and interest | $695,030 | $695,030 |
| Interest only (3 years) | $719,815 | $719,815 |
In this example, you'd save an estimated $24,785 in interest by making principal and interest repayments.
A home loan calculator is a great way to calculate your monthly mortgage repayments according to the interest rate and the type of loan you choose. You can also see how to pay off your mortgage faster with additional repayments.
You may wish to switch your home loan to secure a better interest rate or free up some cash with an interest only loan.
All HSBC home loans can be switched, but you may be charged a fee for changing from a fixed loan before the end of the term.
To switch to another product or refinance a home loan, contact your home loan manager, branch or the contact centre.
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This article is intended to provide general information of an educational nature only. This information should not be relied upon as financial product advice as it does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of the information to your own circumstances and seek independent legal and financial advice prior to making any investment choice. There are risks associated with any investment and this document is not intended to list all of them in respect to any particular investment opportunity. Prices, levels and indications contained in this document are illustrative only and may not represent future performance. HSBC does not warrant or represent the performance of any investment opportunity.
Disclaimer: Credit provided by HSBC Bank Australia ABN 48 006 434 162. AFSL/Australia Credit Licence 232595. Home Loan Terms, Personal Banking Booklet, Fees and Charges and lending criteria apply. This article does not take into account your personal or financial situation. Please consider a relevant Product Disclosure Statement, available at hsbc.com.au or by calling 1300 308 008 before making a decision about this product.
