Interest only or principal and interest

Interest only keeps the monthly payment low and leaves the balance where it is. Principal and interest costs more each month and pays the loan off. Which one suits depends on the household. The loan page shows both figures for a loan, so you can choose on what each does to cashflow now and to equity later.

The monthly payment

On interest only, a home loan costs the interest alone each month. On principal and interest, it costs the interest plus some principal. The principal part grows a little each month as the balance falls.

Under interest only, the difference stays in the household each month. That cash has to do something, in an offset or elsewhere, for interest only to leave you better off.

Interest to maturity

The loan page's interest to maturity is the total interest the current terms charge until the loan ends. Under interest only, the balance never falls, so every year charges interest on the full amount. Paying down the balance, under principal and interest, makes each year's interest a little less.

Over a twenty-five year term, that gap adds up. It is the figure to hold against the monthly saving.

Equity comes from two places

Equity is the property's value less the debt. A rising market builds equity under either repayment type. Only principal and interest also builds it by lowering the debt.

A portfolio that counts on growth alone for its equity carries more risk than one that pays down debt. The stress test shows this. With a flat market and interest-only debt, the position ends where it started.

In retirement

A loan that is still interest only at retirement needs a plan for the balance. That can be a sale, a refinance, or paying it out from super or cash. The retirement plan asks for that plan as a strategy. Its funding outcome shows whether the household can carry the debt or has to clear it.

Record the planned change as a term change from the planned date. That puts it into the projection without changing today's records.