Home loan repayment types
Home loan repayments are typically structured as either Principal and Interest or Interest-Only.
Principal and Interest loans pay off the loan over time and build equity.
Interest-Only loans lower short-term repayments and are mainly used by investors.
Both repayment types can be fixed or variable.
1. Principal and Interest (P&I) Repayments
What It Is
With this repayment type, you pay off both the loan amount (principal) and the interest at the same time, right from the start of the loan term. Your repayments are spread evenly over the loan period (e.g. 25 or 30 years).
Key Features
- Each repayment reduces your loan balance
- Over time, more of your repayment goes toward the principal, and less toward interest
Pros
- Builds equity in your property sooner
- Pays off the loan in full by the end of the term
- Often qualifies for lower interest rates
- Seen as less risky by lenders and regulators
Cons
- Higher monthly repayments than interest-only
- Less flexibility in the short term (e.g. less spare cash for other expenses)
2. Interest-Only (IO) Repayments
What It Is
You pay only the interest on your loan for a limited period (usually 1-10 years). During this time, your loan balance doesn’t reduce. After the interest-only period ends, you start paying both principal and interest.
Key Features
- Available on most investment loans; some lenders restrict it for owner- occupiers
- Suitable for borrowers with short-term cash flow needs
Pros
- Lower repayments during the interest-only period
- Frees up cash for other uses (e.g. renovations, investments, or business needs)
- Useful for short-term strategies (e.g. sell or refinance before P&I starts)
Cons
- Loan balance stays the same during the interest-only period
- Higher repayments later when the loan reverts to principal and interest
- More interest paid overall
- Stricter lending rules, including higher serviceability assessments
| Feature | Principal & Interest | Interest-Only |
|---|---|---|
| Repayment Amount (initially) | Higher | Lower |
| Equity Built From Repayments | Yes | No |
| Total Interest Over Loan Life | Lower | Higher |
| Suitable For | Most buyers & owner- occupiers | Investors & short-term strategies |
| Tax Benefits | Limited (mostly for investors) | Interest may be tax- deductible |
| Risk Level | Lower | Higher (if not managed well) |
| Lending Criteria | Standard | Stricter (especially post- 2017) |