Often referred to as a P&I loan
This is the most common type of home loan for people paying off their family home often referred to as primary place of residence or PPOR.
What this means is that with each repayment you cover the interest amount plus pay a little extra to reduce the loan balance – these are called ‘principal repayments’.
Most loans are based on a term of 25 or 30 years and so when you first start making repayments the amount that comes off the principal is quite small however as the loan balance reduces the proportion of interest in your repayment reduces and so your principal repayments start to make a greater impact.
Most P & I loans also allow unlimited lump sum or additional repayments – these can greatly reduce the term and therefore the interest charged on your loan.
The other type of interest based loan is called “interest only” or IO and as its name implies there are no principal repayments and so the loan balance is not reduced. These types of loans are more commonly used for investors looking to maximise their tax deductions.