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Loan Basics #5:

Q: What do Mortgage Repayments cover?

A: Generally principal and interest. But Interest Only Home Loans do exist.

You have a wide choice of Mortgage Repayment options - including the Interest Only Home Loan. Here we look at:

• • Principal & Interest Home Loans
  • Interest Only Home Loans
  • Monthly, fortnightly or weekly Mortgage repayments
  • Redraw Facility

Principal & Interest Home Loans A Principal & Interest Mortgage (or P & I Home Loan) is a traditional Mortgage in that your repayments cover both interest and principal.

Interest Only Home Loans

With an Interest Only Home Loan, your repayments cover just your interest - not the principal. Only at the end of the agreed period of your Mortgage do you repay the principal and then you repay it in full.

Pros & Cons of Interest Only Mortgages

The advantage of an Interest Only Home Loan is that the monthly repayments are lower than for a normal "Principal and Interest" Mortgage. The disadvantage is that you typically pay more in interest over the full term of the loan.

However most people who take out an Interest Only Home Loan sell the property well before the end of the loan term. Their plan is generally to keep the property just long enough to make an attractive capital gain (ie sell it for much more than they paid).

Monthly, fortnightly, or weekly Mortgage repayments?

Many people pay off their Home Loans on a monthly basis because they get paid monthly. However, it is possible to make Mortgage Repayments on a fortnightly or weekly basis, and this could cost you less over the term of your Home Loan. Talk to an MFAA member to learn more.

Redraw Facility

A Mortgage with a Redraw Facility is specifically designed to allow you to make additional repayments, and still give you access to those extra payments if you need them. It allows you to put extra money towards your Mortgage and can save you money over the term of your Home Loan. If you are considering a Redraw Facility, ask your MFAA member what fees and charges are associated with them.

Want another Mortgage & Home Loan tip?

Home Loans: why use a Mortgage Broker? Check out Loan Basics #06