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Understanding principal and interest and interest only payments
Repayment types explained
Generally, when you make a loan repayment, your repayment pays down some of the principal balance as well as the interest accrued. This is known as principal and interest repayment.
However, you may be able to choose to make interest only payments for a specific period, so you’re only paying interest charged. This means your payments during that period will be lower than principal and interest repayments. Because you eventually have to repay the principal balance, this interest only periods is always limited.
You need to consider your financial situation to plan for the end of your interest only period, when you switch to principal and interest repayments, as your repayment amount will be higher.
Differences between repayments
Principal and interest repayments
- This means you will be paying down your principal balance (as well as interest it accrues) from your first repayment.
- You could pay less interest over the life of the loan as your principal balance will be reduced by each repayment.
- Generally have lower interest rates, but as interest rates can change, it's important to check the current interest rates on loan products before making a loan application or accepting a loan offered by ANZ.
Interest only payments
- You're not reducing the principal balance which interest continues to be calculated on during this period. This may mean paying more interest over the life of the loan.
- Your minimum payments will be lower during the interest only period as you're not repaying the principal balance.
- When your interest only period ends your repayments are likely to be higher, as you’ll need to start paying more in order to pay back the principal balance and interest, within the term initially set for your loan.
- Interest only payments may better suit some customers' investment objectives, taking into account their particular tax and investment arrangements.
Let’s look at an example of two different home buyers’ journeys, where one chooses interest only payments as part of repaying her loan and the other chooses to make principal and interest repayments throughout her home loan term.
The calculations below are based on an interest rate of 5% per annum for principal and interest, and 5.55% per annum for interest only. These are just example rates and the calculations for a particular customer will change depending on the actual interest rate for their home loan.
Rates may change from time to time. Find out more about ANZ’s current home loan interest rates.
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When your interest only loan comes to an end
When the interest only period expires, your repayments will change to principal and interest. This usually means your repayment amount will increase as you will now be repaying principal as well as paying interest on your loan. We’ll remind you a few months before the expiry to help you prepare for the new repayment. However, it may be possible to extend your interest only period. If you’d like to do that, you need to contact us to make an application. Following an assessment of your application, you’ll be advised whether ANZ agrees to extend your interest only period. This application process may take up to four weeks so please make sure you allow enough time before the interest only period expires.
We're here to help
Switch repayment type
To discuss switching from interest only to principal and interest repayments now, call the ANZ Home Owner Direct team on 1800 035 500 Monday to Friday – 8am to 8pm.
Please note; if you switch from, or break, a fixed rate home loan before the end of the fixed term, you may incur an early repayment cost.
Extend your interest only period
To extend your interest only period you’ll need to contact us to make an application. This will require updated information such as your current income and expenditure. Following an assessment of your application, you’ll be advised if ANZ agrees to extend your interest only period.
To complete this process may take up to four weeks so, if you would like to extend your interest only period, please allow sufficient time before your interest only period expires.
Discuss your options
We’re here to help. For any additional information, please contact your lender, visit your local ANZ branch or call our dedicated Home Owner Direct team on 1800 035 500 Monday to Friday – 8am to 8pm.
If you are having financial difficulty which is impacting your ability to make your loan repayments, you can find out more about our options for your circumstance.
This is general information only and does not constitute tax advice. We recommend you obtain independent advice from a financial planner and/or registered tax agent if you are considering the right repayment type for you or purchasing an investment property.
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