Home loan repayment options explained

July 09, 2015
Hannah Fox

Many borrowers are unaware that lenders offer a number of different repayment options to suit their individual circumstances.

Reducing repayments by switching to a period of interest only repayments, making extra repayments to pay off a loan faster or accessing additional repayments quickly, are all options that are now available to borrowers.

Below are some of the repayment options available:

Principal and Interest (P&I)
Principal and interest repayments cover all the interest plus some of the principal (i.e. the actual amount of the loan) so that the loan is gradually repaid over time. Initially, loan repayments comprise mainly of interest but as the principal gradually reduces the interest component will also reduce and the actual loan repayment accelerates.

Interest Only (IO)
Only the interest on the principal is repaid during a specific period of the loan, therefore repayments are lower than with a standard P&I loan. At the end of the interest only period, the borrower must start making principal and interest repayments over the remaining term of the loan.

Fortnightly and weekly repayments
Repayments are generally worked out on a monthly basis, however most lenders will offer the option of fortnightly or weekly repayments. This allows borrowers to time their payments to their pay cycle, assisting in budgeting. Fortnightly or weekly repayments may save you thousands of dollars in interest over the life of the loan.

Higher / extra repayments
By making higher or extra repayments to a loan, the principal is reduced faster, resulting in substantial savings in interest. This is most effective earlier in the loan where the interest makes up the majority of the repayment amount.

Repayment redraw
A redraw facility allows the borrower to access extra repayments that have been made to the loan. Redraw is available on most standard variable rate loans and some basic loans. Some lenders have a minimum redraw amount and may also charge a fee per redraw.

Of course it goes without saying that everyone's circumstances are different and often change over time. That's why its best to obtain professional home loan advice from a qualified mortgage broker.

To find out what home loan and repayment options are best for you, call us today on 03 9432 6070 or click on the 'contact us online' tab at the top of this page.

Posted in: Home loans

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