When applying for a home loan, one of the most important decisions you'll make is choosing the right loan structure. As Mortgage Brokers at Personalised Finance, we regularly help NSW clients understand their Home Loan options and find structures that match their financial situation and property goals.
Understanding Principal and Interest Loans
Principal and interest loans are the most common structure for buying a home. With this option, your regular repayments include both the loan amount (principal) and the home loan interest rate charges. This means you're gradually paying down what you owe while covering the cost of borrowing.
Key benefits include:
• Building home equity from day one
• Paying off your property completely by the end of the loan term
• Often receiving better interest rate discounts from lenders
• Avoiding potential payment shock when interest-only periods end
This structure works well for owner-occupiers and investors focused on long-term wealth building. Your borrowing capacity calculations will typically be based on principal and interest repayments, which lenders view as lower risk.
When Interest-Only Loans Make Sense
Interest-only loans allow you to pay just the interest charges for a set period, usually one to five years. During this time, your loan amount stays the same, but your repayments are lower than principal and interest options.
This structure can benefit:
• Property investors maximising tax deductions
• Buyers expecting significant income increases
• Those managing cash flow during renovations
• Investors planning to sell before the interest-only period ends
Remember that when the interest-only period finishes, repayments increase as you start paying both principal and interest. Factor this into your long-term financial planning.
Fixed vs Variable Interest Rate Considerations
Your loan structure choice works alongside your interest rate type. Fixed interest rate home loans offer payment certainty, while variable home loan rates can fluctuate with market conditions.
Many borrowers combine structures by:
• Fixing part of their loan for stability
• Keeping a portion variable to access features like offset accounts
• Using different structures for different properties in their portfolio
Loan to Value Ratio Impact
Your loan to value ratio (LVR) affects both structure options and pricing. Higher LVR loans may require lenders mortgage insurance (LMI) and could have different structure availability. Some lenders restrict interest-only options for loans above 80% LVR.
Application Process Considerations
The streamlined application process varies between lenders, but most require similar documentation regardless of structure:
• Bank statements showing savings patterns
• Income verification
• Property details and valuations
• Existing debt information
Getting pre-approved through Home Loan pre-approval helps you understand what structures different lenders offer for your situation.
Making Your Structure Decision
Consider these factors when choosing:
- Property purpose: Owner-occupied vs investment
- Cash flow needs: Current and projected income
- Tax implications: Deductibility of interest payments
- Risk tolerance: Comfort with payment increases
- Investment timeline: How long you plan to hold the property
Calculating home loan repayments for different scenarios helps you see the long-term impact. Don't forget to factor in other costs like stamp duty when determining your total borrowing needs.
Getting Professional Guidance
As Home Finance & Mortgage Brokers with access to Home Loan options from banks and lenders across Australia, we can compare structures across multiple lenders. The property market offers various loan products, and what works for one borrower may not suit another.
We help you understand how different structures affect your specific financial situation, from repayment amounts to tax implications. This personalised approach ensures your loan structure aligns with both your current needs and future goals.
Call one of our team or book an appointment at a time that works for you to discuss which loan structure suits your NSW property purchase.
