Interest-Only Home Loans
An interest-only home loan lets you pay only the interest charged on your loan for a set period, typically one to five years, without reducing the loan’s principal balance during that time.
How an interest-only home loan works
During the interest-only period, your repayments cover the interest cost only, your outstanding loan balance stays exactly where it started. Once the interest-only period ends, repayments switch to principal-and-interest, and typically rise noticeably, since you’re now paying down the balance over a shorter remaining term than the original loan length.
Why borrowers choose interest-only
- Lower repayments during the interest-only period, freeing up cash flow for other purposes
- Common for investment properties, where interest payments may be tax-deductible and the strategy focuses on capital growth rather than paying down the loan quickly (see the ATO’s guidance on rental property interest)
- Useful during a temporary income squeeze, such as parental leave or a career transition, where lower short-term repayments help manage cash flow
The risks worth understanding
- You’re not building equity through repayments during the interest-only period, only through any property value growth
- Repayments jump significantly once the interest-only period ends, since the same total debt must now be repaid over a shorter remaining term
- Interest-only loans typically carry a higher interest rate than an equivalent principal-and-interest loan
- Lending criteria are often stricter, since lenders view interest-only lending as higher risk, particularly for owner-occupiers
Who an interest-only loan suits
- Property investors prioritising cash flow and using an offset account to manage funds
- Borrowers with a clear, temporary reason for reduced repayments and a plan for when the period ends
- Anyone comfortable with the repayment increase that follows once the interest-only period expires
Who should think twice
Owner-occupiers using interest-only purely to afford a larger loan than they could otherwise service on principal-and-interest terms should be cautious, this can mean paying more interest overall and facing a larger repayment shock later.
FAQ
Generally yes, since you’re not reducing the principal during the interest-only period, you pay interest on the full balance for longer, and the interest rate itself is often higher than an equivalent principal-and-interest loan.
Some lenders allow an extension, subject to a new assessment of your financial situation, but it’s not guaranteed and depends on the lender’s current policies at the time.
Generally not recommended for most first home buyers, since it delays building equity in the property and results in higher repayments later. It’s more commonly used by investors.