Home Loans: Principal & Interest Vs. Interest Only

Debt is bad. That’s is the mentality of most of us that grew up in a typical Australian household. However, there is a distinct difference between good debt and bad debt the reason I bring this up is because I want to highlight that even though property (with good asset selection) is considered good debt, there are still ways that the loan structure can be good and bad.

Now I do need to highlight that I am not a qualified financial planner or accountant but I’ve worked through this with logical reason and crunched the numbers for my own personal situation to provide to you my opinion on how I see Principal & Interest Versus Interest Only Loans.

Principle & Interest (P&I)

Advantages

• ‘Forced’ debt repayment
• Feel good about ‘paying off the debt’

Disadvantages

• Reduces cash flow significantly
• Financially less liquid than interest Only
• Leverage off the paid principal loan only up to 80%

Interest Only

Advantages

• Creates liquidity in property
• Access to funds is easy
• Can have an offset account to ‘pay’ your debt
• More Flexibility

Disadvantages

• Requires a lot more discipline
• Not all banks and financial institutions offer offset accounts
• Not all institutions offer Interest Only
• Interest Only loans run for a maximum of 5 years (generally)

In Summary