Principal and interest VS interest-only home loans, the great Australian debacle. Majority of Australians say you would be silly not to pay the principal on your home loan, otherwise how on earth are you going to pay it off after 30 years? Or you could sit on the other side of the fence and realise that the capital growth on the property far outweighs the counter-argument, and you may as well pay as little as you can on each mortgage instalment to increase cashflow. Lenders love this debacle and force you to think you can only fit into these two categorize, both of which are a win-win for lenders and make you think you’re making the right choice. There is however a third category, which allows you to shave years off your home loan and $10’s of thousands in interest payments, with the freedom to still use your money as you please. If your still unsure what principle or interest refers to, interest only loans are where you are only paying the interest portion of the home loan, where principal and interest you are paying both the interest portion and a portion to pay off your house or “principal”. Essentially, with an interest-only home loan, you will still be left with the full borrowed amount to pay off at the end of the loan period. For a 30 year $450,000 loan at 4%, you would be paying $1,500 in interest monthly, this is known as the interest-only portion. If you had principal & interest loan, you would be paying $2,148 monthly, this covers both the interest and principal portions. This is a difference of $648 per month and principal & interest home loaners justify this by the re-assurance that the additional amount is going towards their loan and actually paying off their house. As you begin to pay off the home loan during the 360 scheduled monthly instalments over 30 years, a bigger chunk of the $2,148 goes towards the principal amount rather than the interest, until eventually you fully pay off your home. Mixing this all in with principal and interest loans generally being on a lower interest rate than interest-only loans, It does seem like P&I is the best way for you to pay off your mortgage, at least that’s how the banks want you to see it. So, let’s say you went down the interest-only loan route and decided to match the principal and interest monthly repayment. Contributing $2,148 towards your loan, you would still be paying $648 off your mortgage, just with more freedom and choice about it. What if, you decided to pay even more than $2,148? If you contributed an extra $100 per monthly instalment for a total of $2,248, you could shave 2 years and 5 months off your mortgage and save more than $30,170.77 in interest. Now don’t stress if you already have a principal and interest loan, this can also be achieved without paying any more then you usually would, by increasing your monthly loan repayment frequency to fortnightly. If you took the monthly repayment of $2,148, halved it to $1,074, over 26 fortnightly instalments in a year you would pay $27,924 per year towards your loan, compared to only paying $25,776 in total for monthly repayments. Meaning you're contributing an extra $2,148 per year purely towards your home pro-portion of the loan, saving a whopping 4 years off your mortgage and more than $50,138.41 in interest payments. Sound too good to be true? Well, it actually gets better. If you haven’t heard of an offset account, it is basically an account where any money sitting in there will be offset against the principal portion of your home loan, all the while you can transfer money in and out as you please. Meaning if you had a loan of $450,000, with an offset account of $20,000 you would only be paying interest on $430,000, equating to an $800 saving on interest a year. If you had just put this $20,000 into a general savings account at 2%, you would only be earning $400 a year in interest, instead of reducing $800 off your home loan interest. Sometimes money saved is better than money earnt. Using an offset account connect to your home loan, as the additional mortgage pay off the account (as we were talking about before), as well as your general savings account, where your salary should be directly deposited. In combination with a 55-day interest fee credit card, which allows you to pay for your expenses without taking money out of your offset account straight away, maximises the amount of money offsetting your loan. Reducing the amount of interest calculated daily on your loan, creating a snowball effect saving you 10’s of thousands in interest repayments, while still having the freedom to use the money as needed. As always, seek your own professional financial advice for your current situation.

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