Principal and Interest (P&I)
A loan repayment structure where each instalment reduces both the loan balance and the accrued interest.
In detail
On a principal and interest loan each repayment is split between interest and principal. Early in the loan life most of the payment goes to interest because the balance is high. As the balance falls, the interest component shrinks and more of each repayment reduces principal.
Principal and interest is the default structure for owner occupier loans in Australia because it builds equity over time and reduces lender risk. Lenders often price P&I loans more favourably than interest only loans, with rate differentials of 20 to 50 basis points between the two structures on comparable products.
Why it matters for brokers
Most owner occupier clients default to P&I without realising the rate and policy advantages it carries. Brokers can reinforce the benefits when appropriate and explain the repayment trajectory across the life of the loan.
Example in practice
On a $600,000 loan at 6.2 per cent over 30 years, the minimum P&I repayment is around $3,676 per month. In the first year roughly $37,000 goes to interest and only $7,100 reduces principal. By year ten annual principal reduction has grown to over $11,000 as the balance falls.
Related terms
Interest Only Loan
A loan where the borrower pays only the interest charge for a set period, leaving the principal balance unchanged.
Fixed Rate Loan
A home loan where the interest rate is locked in for a set period, typically between one and five years.
Variable Rate Loan
A home loan where the interest rate moves up or down over time in response to market conditions and lender pricing decisions.
Comparison Rate
A rate that combines the advertised interest rate with most standard fees to give borrowers a clearer picture of the true cost of a loan.
Related guides
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