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Understanding principal and interest and interest only payments

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Repayment types explained

Repaying a home loan consists of two components: principal and interest.

Principal is the loan amount you have borrowed from the bank or lender, and interest is the cost charged by the bank for borrowing that principal.

So let's look at a couple of ways you can repay a loan.

When you choose principal and interest repayments, with each repayment you pay off interest and some of the principal loan amount over the agreed loan term.

As the balance of the principal reduces with each repayment, the amount of interest charged will gradually reduce too - that's if interest rates don't change.

This means you could pay less interest over the life of your loan.

You can choose to apply for interest only repayments for a specific period of time, but eventually you will need to pay off the principal as well as the interest accrued.

During this period you're only paying the interest charged on the principal but you're not paying off and reducing the amount you owe on your principal loan amount.

This option means you pay more interest across the life of your loan when compared to paying both principal and interest.

Interest only repayments are generally lower than principal and interest repayments, so it can be a good short-term option if you have other things you need cash for, such as renovations or a holiday.

For more information on how repayments work, contact us at ANZ.

 

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 period 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.

Understanding how these different types of loan repayments work, and how they can change over time is important before deciding on a repayment type.

The information on this page does not apply to ANZ Plus products

Comparing principal and interest vs interest only

Principal and interest repayment

  • 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 repayment

  • Your minimum repayments will be lower during the interest only period as you're not repaying the principal balance.

  • 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.

  • 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.

Want to know more about interest only repayments?

Learn more about interest-only repayments to determine if it could be the right option for you.

Find out more

Repayments calculator

Estimate the impact of switching repayment types.

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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.disclaimer 
 

Looking to extend your interest only period?

To extend your interest only period, you will need 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 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.

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 circumstances.

Find out more
 

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.
 

An interest-only loan runs for a set period of time, and this is negotiated when the loan is first set up.

During the interest only period, you're required to repay the interest only, but not any of the principal.

However when the interest only period expires, you will automatically be moved to principal and interest repayments, which usually means your repayments will increase as you will now be paying both.

We’ll remind you a few months out from your interest only expiry date so you're well prepared.

Closer to that date you'll receive another letter telling you what the new principal and interest repayment amounts will be.

If you've set up a direct loan payment, your repayment amount will be

automatically adjusted when your repayments switch to principal and interest.

If you've set up your own regular repayments, you will need to adjust these to reflect the new repayment amount.

However if you'd like to extend the interest only period, you'll need to contact your lender broker or ANZ 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 by ANZ whether or not you're eligible.

This application process may take up to four weeks, so please make sure you allow enough time before the interest only period expires.

For more information, contact us at ANZ.

Concerned about your repayments?

Costs of living impact everyone in different ways, which can at times include the ability to make home loan repayments. If you find yourself worrying about your next repayment, then depending on your situation we may have ways to help you, which could include restructuring your loan or working out a payment plan to better manage it.

Learn more

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  • Applying for a home loan
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  • Refinancing your home loan
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As well as any other home loan queries you may have.

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You can also chat to an ANZ accredited broker for help with your home buying, investing or refinancing needs.

Important information

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.

Applications for credit are subject to ANZ’s credit approval criteria. Terms and conditions, and fees and charges apply. Australian credit licence number 234527.

For ANZ Fixed Rate loans, you can make early or additional repayments up to a set available tolerance amount (the lesser of 5% of the loan amount at the start of the current fixed rate period or $5,000) each year of the fixed rate period, without triggering an Early Repayment Cost.  An Early Repayment Cost may be incurred if, during the fixed rate period, the available tolerance amount is exceeded, the loan is fully repaid or refinanced, or ANZ agrees to change the interest rate at your request. Please be aware that Early Repayment Costs can be very large. Terms and Conditions apply please refer to the ANZ Consumer Lending Terms and Conditions (PDF) and ANZ Fixed Rate Loans - What happens if you repay some or all of it early? (PDF). Alternatively please visit any ANZ branch or phone the Home Loan Hotline on 1800 100 641, 8:00am to 8:00pm (AEST), Monday to Friday.

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ANZ Mobile Lenders operate as an independently operated ANZ Mortgage Solutions franchise of Australia and New Zealand Banking Group Limited (ANZ) ABN 11 005 357 522. Australian Credit Licence Number 234527.

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