Compare Principal & Interest Home Loans - Australia

Principal and interest home loans are common, and help ensure the loan balance reduces over time. Unlike an interest only loan, which could cost you more in the long run.

The process of researching and choosing a loan can be confusing. That’s why we put together this easy-to-use guide. It’ll provide facts to help you compare a range of principal and interest home loans, so you have tools to help pick a suitable loan and make your property ownership dream a reality.

When you begin repaying a home loan, you may have the choice of two repayment types, and sometimes a combination of both. You can either just pay the interest (at least for a while) or you can pay interest and begin paying off the principal from your first repayment. The former is an interest only loan and the latter is a principal and interest home loan.

Here’s a little more on principal, interest and loan balance:

• Principal is the amount of money you borrow from your lender (the loan amount)
• Loan balance is the amount of principal you still have to repay (so it’s also sometimes called the principal balance)
• Interest is the cost your lender is charging you for the privilege of borrowing money from them, and it’s a percentage of the loan balance.

The mechanics of a principal and interest home loan are the same as for other home loans. You submit an application. The lender reviews your situation. It issues a loan offer, which includes the loan amount, loan term (usually between 25 and 30 years), all the loan fees and charges and the full set of terms and conditions. And then you sign the contract and the lender will transfer you the full loan balance.
The difference arises when you begin making repayments on the loan.

When you first learn about how principal and interest loans work, you might think that your minimum repayment amount should change every time you make a repayment. After all, every time you pay back part of your principal, your interest is being calculated on a slightly smaller amount of money.

What actually happens is that your lender works out how much you need to pay each month (or fortnight or week if you want to pay in either of those frequencies) in order to repay your principal along with the appropriate amount of interest by the end of your loan term. So, as long as interest rates remain the same, your minimum monthly repayments should remain the same every month. It’s just that initially, a larger proportion of your mortgage repayments are made up of interest. And by the end of your loan term, more of your repayment is principal.

If interest rates change, you’ll still make the same repayments if you have a fixed rate loan. If you have a variable rate loan, however, your lender will recalculate your minimum repayment amount to compensate for the rate change.

When you get a principal and interest loan, you begin repaying the principal immediately. The term ‘interest only loan’ is a bit of a misnomer. You see, you generally can’t get a loan and pay only interest indefinitely because you’d never actually repay the principal. Instead, interest only loans allow you to pay just the interest and other fees for a specified period of time (typically a few years) and then you have to begin repaying the principal as well.

For the entire interest only period, the interest is calculated on the same loan principal. Principal and interest loans are usually cheaper over the life of the loan because your loan balance decreases from the very first loan repayment, and therefore the amount of interest you have to pay begins to reduce almost immediately as well. In short, you generally pay less interest when you have a principal and interest loan.

Each has its place depending on the circumstances. For instance, someone who is suffering temporary financial hardship, such as a loss of employment, may appreciate the ability to temporarily reduce their repayments by only paying the interest. On the other hand, a couple planning a family might decide to buy a home big enough for a small family and may want to pay off as much of the loan as possible before they have to start fitting out the nursery, by which time the interest costs should be lower (as they will have reduced their loan balance) and therefore they may be able to afford to keep more cash aside for baby expenses.

Another important factor to think about when comparing home loan rates is the type of interest rate offered. There are two main types of interest rates offered in Australia: variable and fixed. A variable interest rate can change at any time, while a fixed interest rate remains the same for a set period. A third option offered by some lenders is a split rate loan, which has one portion of the loan fixed and the rest set at a variable rate. Choose the type of interest rate that best suits your financial situation and future plans.

Considering these can help you make an informed decision when choosing a principal and interest home loan. Remember to compare home loans, such as the ones in the comparison table on this page, and shop around to find a great deal for your circumstances.

A home loan is one of the biggest financial commitments you‘ll ever make, and it’s important to understand your borrowing capacity when purchasing a property. In Australia, the amount you can borrow with a principal and interest home loan depends on various factors such as your income, expenses, loan-to-value ratio (LVR), deposit, and credit history. The amount you can borrow can also be impacted by your debt-to-income ratio. This ratio is calculated by dividing your total monthly debt payments by your monthly income.

A home loan borrowing power calculator, like the one from MoneySmart, can help with estimating how much you might be able to borrow with a principal and interest home loan.

Once you have an understanding of your borrowing power it’s then essential to compare home loan rates from various lenders, such as those in the comparison table on this page, to find a loan that works for you. When comparing home loan rates, take a look at the comparison rate, which takes into account the interest rate and common fees associated with the loan. The comparison rate can help give you a clearer picture of the cost of a loan and compare different loans more effectively.

It’s also worth considering any additional features and benefits offered by the home loan. Some lenders offer redraw facilities, offset accounts, and flexible repayment options, which may cost more to include, but depending on your circumstances could help you save money on your home loan and make it easier to manage your finances.

Saving for a home loan deposit can be a daunting task for many aspiring home owners, but, with a bit of planning and strategic saving, you can reach your goal of purchasing a home sooner than you might think. In Australia, it’s generally accepted that home loan deposit needs to be 20 per cent of the total value of the property, although this can vary depending on the lender and other factors such as lenders mortgage insurance (LMI).

LMI is a type of insurance that protects the lender in the event that you’re unable to repay your loan. It is usually required if you have a deposit of less than 20 per cent of the property value. This insurance can add thousands of dollars to the cost of your home loan, and it should be considered when calculating how much you need to save for your home loan deposit.

There are scenarios where LMI may not be required, even where the deposit is less than 20 per cent. These can include:

• Having a family member act as a guarantor on the loan
• Being eligible for one of the government home buyer assistance schemes
• Eligibility for an LMI waiver based on your profession.

If you would like some help with your savings strategy, or to understand more about LMI requirements, it may help to speak to a financial advisor or mortgage broker.

Some of the common fees you may come across for a principal and interest home loan include:

• Application and establishment fees. These fees may be charged for processing your home loan application and setting up your home loan. This is usually a one-time fee charged when you submit your application and establish the loan.
• Valuation fee. Your potential lender will charge a valuation fee to determine the market value of the property you want to purchase. This fee is typically paid to a licensed valuer, and is an essential part of the home loan approval process.
• Ongoing fees. Many home loans come with ongoing fees, such as an annual fee, account keeping fee, or ongoing service fee. These fees are usually charged annually, and are designed to cover the ongoing costs of maintaining your home loan.
• Break fee. If you are on a fixed rate mortgage and choose to refinance or repay your home loan in full before the end of its term, you may be charged a break fee.

Fees can vary significantly depending on the lender, so it's important to compare home loan rates and fees to help find a great deal.

The interest charges on a principal and interest home loan are calculated based on the amount of money you borrow, the interest rate, and the loan term. The interest rate is usually expressed as an annual percentage rate (APR) and is used to determine the amount of interest you'll pay over the life of the loan.

To calculate the interest charges, you can use a home loan calculator, such as the one found on MoneySmart. Simply enter the loan amount, interest rate, and loan term, and the calculator will give you an estimate of your monthly payments and the total amount of interest you'll pay over the life of the loan.

It's important to compare home loan rates from different lenders before making a decision, and to remember that the interest you will pay is only one factor to compare. You can start with the comparison table on this page, but if you need more help, you may want to speak to a mortgage broker or financial adviser.

While there is no one size fits all “best” principal and interest home loan, there are some steps which may help you find a suitable option. Once you’ve decided you want to apply for a principal and interest home loan, the next step to consider is to compare a range of home loan options. Comparing a range of principal and interest loans could give you confidence and information to help choose a home loan that’s suitable for you.

Our main home loan comparison page includes a guide to comparing home loans. You can update it specifically for principal and interest home loans, by adding these questions into the mix:

• Are you planning on renovating the property you buy sometime down the track? If so, you might appreciate having an offset account, which would enable you to reduce how much interest you have to pay while you save for your renovation. Or you might enjoy a redraw facility, which would enable you to withdraw extra repayments if you need extra funds to pay for the renovations. (Unlike with a credit card, once you make a repayment, those funds can no longer be accessed unless your home loan includes a line of credit or offers a redraw facility.)
• Have you got a deposit equal to 20 per cent of the value of the property you want to buy?
• Is this loan for your first home? If so, you might look to apply for one or more of several government and state and territory schemes designed to make buying your first home easier.

And don’t forget to compare the comparison rates of the loans you’re considering, as this will give you a good idea of how the loan fees impact how much you’ll pay the lender over the life of the loan.

Getting a principal and interest home loan can be a complex process, but with proper planning and preparation, the wait time can be reduced. The time it takes to receive approval for a home loan depends on several factors, including your credit score, income, and the type of loan you are applying for. Depending on the complexity of your loan application, you can expect to wait anywhere from a few days to more than a few weeks.

The first step in the process of getting a home loan is to gather all the necessary documentation, including proof of income, tax returns, and employment history. This information is used by lenders to determine your ability to repay the loan and your creditworthiness. Once the lender has received the required information they will begin to assess your application.

Once the assessment process is complete, the lender will either approve or deny your loan application. If your loan is approved, the lender will issue a formal offer, which will outline the terms and conditions of the loan. The final step is to complete the settlement process. During this time, the lender will transfer the funds to the seller, and you will become the new owner of the property.

If you would like to shorten the time it takes, one thing you can do is be well-prepared before you apply for your loan. This means having all the necessary documentation ready, and having a clear understanding of the type of loan you want to apply for.

Another way to reduce the waiting time is to work with a reputable and experienced mortgage broker. A mortgage broker can help you find a great home loan for your needs, and can guide you through the application process. They can also help you get pre-approved for a loan, which can speed up the approval process and help you negotiate a better deal.

One of the primary benefits of refinancing your principal and interest home loan is the opportunity to secure a lower interest rate. When you refinance, you can compare home loan rates from different lenders, and choose a suitable option for your financial situation. Refinancing to a lower interest rate can result in significant savings over the life of your loan, because a lower interest rate can reduce the amount of interest you pay on your mortgage.

Refinancing can also give you the opportunity to change the loan type you have, such as switching from a variable to a fixed rate loan. It may also help you pay off your mortgage faster by allowing you access to different features, such as an offset account or redraw facility (if you don’t already have these features).

When considering refinancing, it is important to compare home loan rates from multiple lenders to find the best deal – you can start with the comparison table on this page. You can compare interest rates, as well as other factors such as the fees and features associated with each loan.

A home loan is often the biggest financial commitment a person will make in their lifetime, and it is important to understand the impact it can have on your credit score. Your credit score is a numerical representation of your creditworthiness and is used by lenders to help determine your loan eligibility. The credit score takes into account your credit history, outstanding debts, missed payments and defaults, and other factors.

A principal and interest loan can have a positive impact on your credit score if you make all your payments on time and in full. Late or missed payments, however, can have a negative impact on your credit score.

A good credit score can make it easier for you to access credit in the future, because lenders will generally view you as a lower risk. Additionally, a good credit score may also result in lower interest rates and more favourable loan terms, which can save you money in the long run.

It's important to note that your credit score is not just impacted by your home loan, but by all your credit obligations, including credit cards, personal loans, and other debts.

When assessing your eligibility for a principal and interest home loan, there are several factors that lenders will consider, including:

• Income and employment status. Lenders will assess your income and employment status to ensure that you have a stable and reliable source of income to make your repayments. Most will require you to have a permanent job or, if you're self-employed, to provide evidence of your income and business stability.
• Credit history. Your potential lender will check your credit history to assess your creditworthiness, and to ensure that you have a good repayment history. If you have a poor credit score with a history of defaulting on loans or credit card debts, it may impact your chances of being approved for a home loan.
• Loan-to-value ratio (LVR). Lenders will assess your LVR, which is the amount of money you want to borrow compared with the value of the property.
• Debt-to-income ratio (DTI). Your DTI ratio is a measure of how much debt you have compared with your income. Lenders will assess your DTI to assess whether you’re able to repay your home loan on top of your other debts and expenses.
• Savings and assets. Lenders will also consider your savings and assets when assessing your eligibility for a home loan. This includes your savings history, the amount of money you have in the bank, and any assets you own.
• Dependents. If you have children or dependents this can impact your spending habits and financial commitments. Lenders will assess this when considering your application.

It's important to remember that each lender has their own specific criteria and requirements, so it's worth shopping around and comparing home loans to find one that best suits your needs – why not start with the comparison table on this page?

Here's a simple guide on how to apply for a home loan in Australia.

• Research and compare home loan rates. Before applying for a home loan, you’ll need to find the one you want to apply for, so you might want to compare a range of different rates offered by different lenders – you can start with the comparison table on this page. This will help you find a loan that will suit your specific needs and circumstances.
• Choose a lender. Once you’ve compared the different home loan rates and found one that meets your needs, it’s time to choose the lender you’d like to go with.
• Gather the required documents. To apply for a home loan, you’ll need to provide various documents, including proof of income, proof of identity, and proof of residency. You may also need to provide details of your current debts and assets.
• Submit your application. To apply for a home loan, you’ll need to fill out an application form and provide the required documents to your chosen lender. Your potential lender will then assess your application and determine whether you’re eligible for a home loan.
• Approval. Your lender will notify you of their decision on your home loan application. If your application is approved, you’ll receive a loan offer, including the loan amount, interest rate, and repayment terms.

If you want someone to tell you which home loan to choose, you might like to consider speaking with a mortgage broker or lender for that level of advice.

What we’ve done with this article is provide jargon-free facts to help you better understand how this kind of loan actually works, and then we’ve provided simple, easy-to-follow questions to help you compare a range of home loan options, for these and other kinds of loans. This means you’ll have tools to help you choose a principal and interest home loan, or any other kind of credit, that’s suitable for your needs.