Page 14 - Smartline eBook - First home buyer

Getting the home and the loan
How to choose the right home loan
One of the most important decisions you’ll make in buying your first home is choosing your home loan. After all, you’ll be making loan repayments for some time, so it’s vital you choose a loan with features that suit your goals and lifestyle.
Below we’ve set out some of the more important decisions you’ll need to make.
Should your home loan be principal and interest, or interest only?
The principal is the amount you borrow and the interest is what your lender charges you for borrowing the principal.
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Principal and interest loans are more common and, as the name implies, your repayments go towards both the loan amount and the interest charged on it.
At the beginning of the loan, the majority of the payment goes to the interest component. But as the loan progresses, the proportion of the payment that goes toward reducing the principal increases.
Interest-only loans allow you to pay just the interest and not the principal amount. This makes your repayments lower but you won’t build any equity in the property unless its value rises. Most interest-only loans revert to principal and interest loans after a set period, so you need to make sure you can continue to cover the cost of the loan when this happens.
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First home buyer guide