Interest-only home loans might be tougher to get, but great deals still abound for those who know where to look.
APRA's recent clampdown on interest-only lending means it's getting harder to find the products, which makes comparing your home loan options all the more important. There are still plenty of great interest-only home loans available.
Compare our interest-only home loans in the table below
*Many of the loans in the table below offer interest-only options but may come with higher interest rates than those displayed. You can compare interest-only home loans for both owner-occupiers and investors.
How can this page help?
Interest-only loans differ from standard home loans in the way they're repaid. Traditional principal and interest home loans have repayments that include both the interest and a small proportion of the principal. Interest-only home loans, on the other hand, repay only the interest portion of the loan for a fixed period, usually up to five years. While you make interest-only repayments you won't be reducing the principal, but you will reduce the size of your monthly repayment.
Hear the industry experts (listed below) share some thoughts around interest-only loans:
The short answer is yes, but there are a few things you can do to give yourself the best chance of success.
The Australian Prudential Regulation Authority (APRA), the body that regulates Australian banks, has put a 30% cap on new interest-only lending. That means interest-only loans can only account for 30% of all the new home loans written by banks. You'll be competing against a lot of other investors to be part of that 30%.
With that in mind, there are some things you can do to help your chances:
- Have a bigger deposit. Many banks are more willing to consider an interest-only home loan if you have a lower loan-to-value ratio (LVR). A bigger deposit, usually at least 20%, will make you a more attractive borrower.
- Have a plan. Lenders will want to know why you want an interest-only home loan versus a principal and interest loan. If you can explain your justification for the loan and demonstrate your investment plans, you'll be in a much better position.
- Consider a non-bank lender. Non-bank lenders are unique in that they raise funds through wholesale markets rather than customer deposits. Because of this, they're not held to the same capital requirements as banks. While non-banks are regulated and have to abide by responsible lending obligations, they're not restricted by the same concrete speed limit on interest-only lending.
Interest-only loans can be an option for some investors. Investors will usually use interest-only loans to purchase a property and make minimal repayments. Many investors use this strategy because interest payments on an investment home loan are tax deductible. Investors choose interest-only home loans to minimise their monthly repayments while maximising cash flow and tax effectiveness.
Interest-only loans are a popular strategy for property investors who are expecting to see strong growth in the value of their property. Savvy investors buying the right property at the right time can make minimal repayments with an interest-only loan and then sell the property before they start paying off the principal. The risk with this strategy is that if property prices fall you'll have negative equity.
What if I'm an owner-occupier?
Interest-only home loans may not be a great option for owner-occupiers. Most owner-occupiers who choose the products do so to minimise their monthly repayments. This is why banks are very hesitant to agree to an interest-only home loan for an owner-occupier. If you can't afford to make principal and interest repayments on your home loan, it's likely that you've borrowed more than you can afford.
One of the main dangers of owner-occupiers using an interest-only home loan is that the repayments can rise dramatically when the loan reverts to principal and interest. In the meantime, you won't be making headway on paying down your debt. Owner-occupiers should think very carefully before choosing these products.
- Lower repayments. With an interest-only mortgage, you'll have lower repayments compared to a comparable principal and interest loan. This is because you're not paying the principal aspect of the home loan.
- Tax savings. If you're an investor, your repayments may be tax-deductible, particularly if you use a 100% offset account. This is because interest on funds withdrawn from an offset account rather than redrawing from your home loan are tax deductible.
- Need to refinance. Interest-only periods generally last about 5 years, after which you might have to refinance to another lender if you wish to continue making interest-only payments
- Market risk. There can be higher risk than principal and interest loans as you're not building equity in the property, meaning if property values decrease you could end up owing more than your property is worth.
Industry experts reveal the risks of interest-only home loans.
There's no one best interest-only home loan, but there are different ways to find out if a home loan is the right one for you. You should compare interest-only home loans on:
- Fees. You might be looking for an interest-only home loan with low upfront and ongoing fees.
- Interest rates. Interest rates are slightly more important when comparing interest-only home loans as there's no principal repayment, meaning the full amount of your interest repayments will rely on the interest rate you're paying.
- Features. Many borrowers opting for interest-only home loans also opt for 100% offset accounts, as they can be used to realise tax savings. Other features such as the ability to make extra repayments, bring your loan with you to a new property, or split your loan into fixed and variable portions might be important.