Finder makes money from featured partners, but editorial opinions are our own.
Interest only fixed rate mortgages
A fixed rate home loan with interest-only repayments is ideal for investors, giving you repayment certainty and a lower cost per month. Here's how to get the best deal for you.
{"menuItems":[{"label":"Comparison of fixed rate interest-only home loans","anchorName":"#comparison-of-fixed-rate-interest-only-home-loans"},{"label":"How do fixed rate interest-only home loans work?","anchorName":"#how-do-fixed-rate-interest-only-home-loans-work"},{"label":"What are the benefits of a fixed rate interest-only home loan?","anchorName":"#what-are-the-benefits-of-a-fixed-rate-interest-only-home-loan"},{"label":"Who are these loans suited to?","anchorName":"#who-are-these-loans-suited-to"},{"label":"How to compare fixed rate interest-only home loans","anchorName":"#how-to-compare-fixed-rate-interest-only-home-loans"},{"label":"Things to consider about a fixed rate interest-only home loan","anchorName":"#things-to-consider-about-a-fixed-rate-interest-only-home-loan"},{"label":"How to apply for a fixed rate interest-only home loan","anchorName":"#how-to-apply-for-a-fixed-rate-interest-only-home-loan"}]}
Interest-only fixed rate home loans can be less expensive loans in the short term, as you only repay the interest portion of the home loan repayment. This means you don't pay any amount towards the principal each month, and you have repayment certainty, because your interest rate doesn't change.
The down side? With an interest only loan, you're not repaying any of the debt. If you take out a $500,000 IO loan and make repayments for two years, then after two years of interest-only repayments, you'll still owe $500,000.
These home loans may not seem to make sense at first (who wants to make repayments on a debt that never goes down?!) But, they actually serve a solid purpose for a really specific type of borrower: usually an investor, or an owner-occupier who needs to lower their repayments for a while. After the table of options, let's dive into how these loans work and how to apply for them.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
It takes just 30 seconds to book your free home loan consultation and get started
Once you’ve entered your details, an Aussie broker will be in touch to start supporting you on your home loan journey.
Our panel of 25+ lenders will allow you to compare 100’s of rates
Get access to free suburb and property reports
Have expert guidance through the entire application process.
An expert leader in mortgage brokering
Thank you for your enquiry! A local mortgage broker from Aussie will contact you shortly to discuss your options.
How you can prepare for your call with your mortgage broker
{{{successMessage}}}
Thank you for your enquiry! A local mortgage broker from Aussie will contact you shortly to discuss your options.
How you can prepare for your call with your mortgage broker
{{{successMessage}}}
How do fixed rate interest-only home loans work?
Interest-only home loans are mortgages that require you to pay only the interest on the amount you have borrowed, rather than paying off the principal amount in instalments each time you make a repayment. If you have borrowed $500,000, your monthly repayments will be lower on an interest only repayment than on a regular home loan contract, where you pay off the principal amount as well as the interest.
$500,000 fixed rate loan with interest only (IO) repayment at 2.19%: $1,895
$500,000 fixed rate loan with principal and interest (P&I) repayment at 2.19%: $913
The repayments are much lower with an IO loan, as you can see – in our example above, it's less than half. This means you'll pay almost $1,000 less per month, or $12,000 less per year.
But, the flip side to that coin is, at the end of one year, the full amount of $500,000 would still be owing. With the P&I loan, you would have chipped away at $12,000 of the debt by then. Your home loan balance would be repaid down to $488,000, so you're making progress towards owning your home outright.
What are the benefits of a fixed rate interest-only home loan?
A fixed interest rate loan allows you to budget precisely each month, as the amount you are required to pay back never changes.
This can make monthly repayments easier to manage, especially if your interest-only repayments are being made on a property you are not yet living in (such as a home that's under construction).
Fixed rate interest-only home loans are short-term home loan contracts that only usually last for one to five years.
The important thing to know about interest-only home loans is that they are only available for short periods of time, as the bank eventually wants to see you make some headway with the principal. Think about it this way: if you had an interest-only home loan forever, you'd never own your own home. They are not recommended as a method to help you pay for your mortgage and afford your everyday living expenses.
Who are these loans suited to?
Interest-only home loans are traditionally tailored for and suited to investors who plan to sell after only a short period of time and whose personal financial situation doesn’t necessarily benefit from paying off the principal borrowed amount. However, interest-only home loans are becoming more popular with people who might benefit from a short period of substantially lower repayments, including:
You are buying a property as an investment and plan to sell after renovations or after a small period of time has lapsed.
You are planning renovations on the property you are buying and still need to pay your rent or mortgage repayments on another property in the meantime.
You have just gone freelance or have a fluctuating income and are expecting a short period of irregular income.
You would benefit from a short time of lower monthly repayments for another reason and building equity for the time being or borrowing against your existing home loan is not suitable for you.
How to compare fixed rate interest-only home loans
Maximum loan amount. While you are searching for the loan thats suits you, one of the first things you will ask about is the maximum amount that you can borrow for this kind of loan.
Maximum Loan to Value Ratio (LVR). The LVR is the amount of money you are borrowing compared to the value of your property.
Offset account.Offset accounts can be a huge help when you’re paying off a home loan, especially one packed with features and flexibility. Proper use of an offset account that suits your needs can mean saving thousands in interest over the life of the loan. These are rare on a fixed rate loan.
Repayment flexibility and loan options. Finding a lender and a contract that suits your specific needs is very important. Features like the ability to make extra payments without incurring charges, or the flexibility to choose whether to make your installments weekly, monthly or fortnightly, can help to tailor a home loan that suits you.
Redraw facilities. Being able to redraw from your home loan and take advantage of any extra payments can be helpful if you find yourself in a tight spot.
Things to consider about a fixed rate interest-only home loan
While it might seem like a great idea at the time, interest-only home loans should be taken out with caution and there are some pretty significant disadvantages to be aware of before you sign up.
The most glaring downside is that you are not actually paying off your home. This means that you are not building equity, and at the end of the loan period you are essentially where you started.
Another problem with fixed rate interest-only home loans can be that once your interest-only period is over, the amount you will need to pay in monthly instalments will actually increase. This is because the principal amount will not have changed and nor will the loan term, meaning that the same amount will have to be paid back in fewer instalments.
If you are using an interest-only home loan to bet on an investment, a lot rests on your ability to pick the market. While we do have a relatively stable property market here in Australia, real estate can be full of surprises. If you get it wrong you are looking at higher monthly repayments, paying more money in interest over the life of the loan or even losing money.
How to apply for a fixed rate interest-only home loan
Deposit. The rule of thumb for the beginning of any home loan is to have a 20% deposit upfront. This makes not just the down payment more manageable, but also all of the start-up fees and charges associated with a home loan.
Meet income requirements. In order to be eligible for a home loan, you will need to meet income requirements.
Guarantor. If you don’t have enough upfront or enough documentation to prove your ability to pay back the loan, using a family home as a guarantee can help you meet eligibility requirements.
If you think you are eligible and would like to apply, you will need to provide documents to prove your case to your bank or lender.
Identity. You will need to provide appropriate documentation to prove your identity.
Proof of income. Payslips, tax statements and other proof of a steady income will be required when applying for a home loan.
When you are considering entering the property market for the first time or as an investor, it pays to ask lots of questions and shop around to find the home loan that suits you, your lifestyle and your financial requirements.
Marc Terrano is a lead publisher and growth marketer at Finder. He has previously worked at Finder as a publisher for frequent flyer points and home loans, and as a writer, podcast host and content marketer. Marc has a Bachelor of Communications (Journalism) from the University of Technology Sydney. He’s passionate about creating honest and simple reviews and comparisons to help everyone get value for money.
While getting a 10-year fixed rate home loan might be a good idea if you want to keep your repayments the same over the next decade, you will pay more if interest rates drop.
Thirty year fixed rate home loans are a great way to lock in a great interest rate for the entirety of your loan but Australia doesn’t currently offer this lengthy loan option.
How likely would you be to recommend finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Important information about this website
finder.com.au is one of Australia's leading comparison websites. We are committed to our readers and stands by our editorial principles
We try to take an open and transparent approach and provide a broad-based comparison service. However, you should be aware that while we are an independently owned service, our comparison service does not include all providers or all products available in the market.
Some product issuers may provide products or offer services through multiple brands, associated companies or different labeling arrangements. This can make it difficult for consumers to compare alternatives or identify the companies behind the products. However, we aim to provide information to enable consumers to understand these issues.
We make money by featuring products on our site. Compensation received from the providers featured on our site can influence which products we write about as well as where and how products appear on our page, but the order or placement of these products does not influence our assessment or opinions of them, nor is it an endorsement or recommendation for them.
Products marked as 'Top Pick', 'Promoted' or 'Advertisement' are prominently displayed either as a result of a commercial advertising arrangement or to highlight a particular product, provider or feature. Finder may receive remuneration from the Provider if you click on the related link, purchase or enquire about the product. Finder's decision to show a 'promoted' product is neither a recommendation that the product is appropriate for you nor an indication that the product is the best in its category. We encourage you to use the tools and information we provide to compare your options.
Where our site links to particular products or displays 'Go to site' buttons, we may receive a commission, referral fee or payment when you click on those buttons or apply for a product. You can learn more about how we make money.
When products are grouped in a table or list, the order in which they are initially sorted may be influenced by a range of factors including price, fees and discounts; commercial partnerships; product features; and brand popularity. We provide tools so you can sort and filter these lists to highlight features that matter to you.
Please note that the information published on our site should not be construed as personal advice and does not consider your personal needs and circumstances. While our site will provide you with factual information and general advice to help you make better decisions, it isn't a substitute for professional advice. You should consider whether the products or services featured on our site are appropriate for your needs. If you're unsure about anything, seek professional advice before you apply for any product or commit to any plan and read any disclosure documents (such as any Target Market Determination (TMD) and/or Product Disclosure Statement (PDS)) issued by the provider before making a decision.
Providing or obtaining an estimated insurance quote through us does not guarantee you can get the insurance. Acceptance by insurance companies is based on things like occupation, health and lifestyle. By providing you with the ability to apply for a credit card or loan, we are not guaranteeing that your application will be approved. Your application for credit products is subject to the Provider's terms and conditions as well as their application and lending criteria.
Please read our website terms of use and privacy policy for more information about our services and our approach to privacy.
