Some banks offer a number of repayment options to satisfy customers’ needs and budget. And if one decides a plan to loan, he or she should consider the total interest and other charges, how flexible the plan is, and his or her current and expected financial commitments and future income.
There are three different types of home loan repayments that are being offered, namely table repayments, interest-only repayments, and straight line repayments.
The most common type of home loan repayment is table repayments, where repayments remain the same over the term of the loan.
How it works. In table repayments, the total amount that is required to be paid over the term of the loan is added to the amount you borrowed or the principal. This amount is then divided into equal repayments over the term of the loan.
Generally, you are paying more interest at the start. This means that initially, you are not building up much equity or the amount you own in your home. However, learn that the balance changes over time. Later on the term, you will repay more principal than interest, building your equity faster.
Pros and cons. Such a repayment type helps you keep on track as repayments are set by dates by which the loan will be paid off. However, fixed regular repayments might get difficult to make if you have unsteady income.
Straight line repayments
With this type of home loan repayment, repayments will be larger at the start but reduce bit by bit each time with you paying slightly less interest over the term of the loan.
How it works. The amount you borrow or the principal is divided into equal repayments over the term of the loan. It is then applied to each of the repayments. Over time, the principal is reduced. In contrast, the equity in your home will increase. With this, your repayments will be reduced a little each time.
In this type of repayment, you only get to pay the interest with each repayment. The principal must be repaid at the end of the term of the loan. Generally, interest-only terms are available up to two years for the procurement of an occupied property while up to five years of a residential investment property.
Pros and cons. Preferred by those who purchase a property that is expected to be used as an investment in the future, interest-only repayments enable investors to claim interest paid as a tax deduction. This is when the loan is used to purchase a residential investment property that is earning rental income.
If you want to learn more about loan repayments, contact us today! You can check our loan repayment calculator to work out the estimated monthly repayments you need to make.