Principal is the amount of money you have borrowed, while interest is the money charged on top of the principal. This is based on your interest rate and size of your loan.

Most home loans require P&I repayments, this means that your repayments are split into two portions, with some going towards the interest owed and the rest going towards paying off the loan itself.

With a P&I loan, you’ll be paying your principal balance (as well as any interest it accrues) from the first repayment, so you’ll be paying less interest over the life of the loan. P&I loans also typically have lower interest rates

By paying principal & interest, you’ll be building up the equity in your home from the first repayment. Equity is the difference between what your house is worth and what you owe on it. You could use your equity to buy a new car, pay for a wedding or honeymoon, or for a deposit on a new home or investment property.

With an interest only loan, you aren’t reducing your principal balance when making repayments during the interest only period. This may mean paying more interest over the life of the loan.

Your minimum monthly repayments will be lower during the interest only period as you’re only paying the interest, not the principal.

Once your interest only period ends your repayments will change to P&I meaning that your repayments are likely to be higher, as you’ll need to start paying more in order to pay back the principal balance (which you haven’t started paying off yet).

Interest only repayments may better suit someone who is looking for an investment property. Interest only home loans can have some short-term benefits such as lower monthly payments, potential tax benefits and may free up cash to invest elsewhere.