Interest-only loans offer lower initial repayments, but you pay more interest over the full loan term.
Average interest-only rates are 7.59%, higher than average principal and interest rates at 6.92%.
Investors often use these loans for tax deductions, but plan for significantly higher repayments later.
What is an interest-only home loan?
An interest-only home loan is where you only repay the interest charges on the loan. Your loan principal (the amount you've borrowed) does not decrease because you're not making repayments towards the loan itself.
With an interest-only home loan you choose a fixed term of up to 5 years if you're an owner occupier and up to 10 or even 15 years if you're an investor. The loan will then switch to a principal and interest home loan and your repayments will be much higher.
Interest-only home loans have higher interest rates, but the monthly repayments are still lower than a full principal and interest repayment.
How interest-only loans work
There are 2 parts to any home loan repayment: the principal and the interest.
Principal
The principal is the money you borrow from the lender. That's your loan and that needs to be repaid.
Interest
Interest is charged by the lender as a percentage of the money you've borrowed. The amount of interest charged depends on the loan's interest rate.
Most borrowers take out principal and interest home loans where they pay both of those at the same time.
With an interest-only home loan, you delay repaying the principal and only pay the interest charges.
Interest-only home loan rates
Interest-only home loan rates will be higher than principal and interest home loan rates. The lowest interest-only variable rate for an owner occupier in Aug 2026 is 5.84%. But the average interest-only rate is 7.59%.
In comparison, the average variable interest rate for a principal and interest owner occupier loan is 6.92%.
Source:Finder database
Factors that influence interest-only home loan rates
Interest-only home loan rates will depend on Australian economic factors, individual lender policies and your own home loan needs.
RBA cash rate: All home loan interest rates are impacted by the national RBA cash rate. If the RBA cuts or increases the cash rate, variable home loan rates will cut or increase as well.
Your LVR: Your specific home loan interest rate may be determined by your loan-to-value ratio (LVR). Lenders will offer lower interest rates to people with higher deposits or equity.
Type of loan: The type of loan you're taking out will change the interest rate you can expect. For example, you might find special offers for first home buyers or higher interest rates for construction or investment loans.
Fixed terms: Fixed term home loans have different interest rates depending on which term you choose. This can change based on the interest rate environment at the time. For example, if rates are going down, shorter fixed term rates might have lower rates than if rates were going up.
Why do people take out interest-only home loans?
Borrowers take out interest-only home loans for a few reasons:
Repayment shock. Particularly during periods of rising interest rates, borrowers feel the strain of higher repayments. By switching their home loan to an interest-only home loan, they can lower their repayments for a while.
Free up cash flow for other needs. By lowering their repayments with an interest-only home loan, borrowers can use the extra cash for other financial needs like investing or making a large purchase.
Free up cash flow for debts. Borrowers with multiple debts can use the savings from an interest-only home loan to pay off debts with higher interest rates.
Tax benefits for investors. Investors often use interest-only home loans because they can claim mortgage interest payments as tax deductions. As an investor you can take out a longer interest-only term.
Building a home. Interest-only home loans are often used for construction loans, giving borrowers more flexibility while their home is being built.
Pros and cons of an interest-only home loan
Pros
Lower repayments frees up cash flow: You can either put the money you save into other investments or simply use it for a little extra breathing space.
Investors get tax benefits: Investors can claim interest payments as tax deductions, so interest-only loan repayments are fully tax-deductible.
Property price growth: Although you're not paying down the loan, your property could increase in value and boost your equity anyway.
Cons
Your home loan will cost more: Because you're not paying down the home loan itself, you'll be paying even more in interest over the life of the loan.
You may not build equity in your home: While you're not paying down the home loan you're not owning any more of the property. If your property value falls, you may be in a worse position than when you bought the home.
Stricter lending criteria: It can be harder to get an interest-only loan.
How do investors use interest-only home loans?
Interest-only investment loans are popular with property investors. If you own an investment property, you're allowed to claim any mortgage interest payments as tax deductions. That's because you can't claim any payments off the principal (and homeowners can't claim anything).
Let's say you have an investment property loan worth $400,000. The interest-only repayments are $1,500 per month, while principal and interest repayments are $2,500.
You can only claim the interest part of the payment ($1,500), so you might decide to get an interest-only loan to do the following:
Pay a lower amount each month.
Keep your financial obligations low.
Have a mortgage payment that is fully tax-deductible.
Use the money you're not paying on the loan principal towards another non-tax-deductible debt, like your own personal home loan.
Interest-only investing in a booming market
Some savvy investors buy a property in a booming market and then hold onto it for just a few years. While the property grows in value, they just pay off the loan interest and use it to reduce their tax bill. They also earn rent, which they might put into an offset account or save elsewhere.
But they never repay the loan. Instead, they stick with interest-only repayments and then sell the property for a higher price.
This doesn't work when property prices aren't growing fast and is obviously a pretty risky investment strategy.
How to compare interest-only home loans
Here's what you need to do to find the best interest-only home loan for you:
Look at interest rates. Interest-only loans have higher rates, so it's very important to find a more competitive mortgage.
Find the right features. If you have extra cash lying around, you can use a 100% offset account to save on interest charges. But if you're an investor and you have an owner-occupier loan as well, you may want to save your money there instead (because interest on investment loans is tax-deductible).
Add up the fees. Be sure to add up the cost of application, settlement and monthly fees. Some lenders charge hundreds of dollars in fees, others almost nothing.
Our expert says
"Although your repayments will reduce for the short term, you will end up with even larger monthly repayments once the interest-only period ends. If you're taking out an interest-only loan because you're struggling with repayments, you need to consider whether you'll be able to afford those larger repayments.
The overall cost of the loan will be much higher, but there is a way you can minimise that.
If you can afford those larger repayments and even a little bit more, by making extra repayments towards your loan you'll cut down the principal even faster. The more you pay down the principal, the less interest you'll pay."
APRA removed its limits on interest-only lending years ago, but lenders are still extra careful when assessing interest-only borrowers.
You can maximise the chances of getting your application approved by doing the following:
Saving 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). This means having a 20% deposit or higher.
Making a plan. Lenders will want to know why you want an interest-only home loan instead of a principal-and-interest loan. If you can explain your justification for the loan and demonstrate your investment plans, you'll be in a better position.
Talking to a mortgage broker. A mortgage broker can help you find a loan that suits your needs and financial situation. The broker vets your application before the lender does, maximising your chances of approval.
How can I make sure I manage my interest-only loan?
Borrowers with interest-only loans need to pay careful attention to their home loans. To help you stay on top of your mortgage, you should do the following:
Understand when the interest-only period ends. If you don't know or can't remember, check with your lender. You can prepare for the end of the interest-only period by using a loan repayment calculator and checking how much your repayments will increase with principal-and-interest repayments.
Build up a savings buffer. If you know that your home loan repayments are going to rise when the interest-only period ends, having some extra cash saved up could help you meet the higher repayments.
Review your spending. Taking stock of your monthly income and how much you spend helps you keep on track with your mortgage repayments. It makes it easier to find areas you can cut back on too.
Your interest-only mortgage questions answered
When your loan's interest-only period ends, you start making principal-and-interest repayments. This means the amount you have to repay your lender increases.
When the interest-only period on your loan ends, you should take the following steps:
Review your loan's interest rate and repayments. Don't get caught out when your interest-only period ends. Make sure you know exactly how much you are paying now. Make sure your loan's rate is not too high.
If you want to extend the interest-only period, talk to your lender. Just remember that the longer you do this, the more expensive it will be for you.
Compare rates and consider refinancing your home loan. Look at your loan and see if there are more competitive loans on the market you can switch to.
This depends on your lender and your own financial circumstances. But it is often possible to extend the interest-only period on your loan.
You will need to check with your lender.
It is possible to refinance to a new home loan during the interest-only periods. Borrowers typically start with an interest-only loan and try to refinance to a principal-and-interest loan.
Interest-only loans attract higher interest rates because they are higher-risk loans. Because the borrower is not paying the loan back at first, the lender charges more interest.
If you currently have a home loan with principal-and-interest repayments, you may be able to switch to interest-only repayments for a while.
You'll need to check with your lender. Keep in mind that you will end up with a higher interest rate by doing this.
You can sell your home at any time. But if you've never paid off any of your loan's principal, then you don't actually own much of the property.
You could still sell, but once the loan is paid off, you'd end up with very little money – especially if you had a small deposit to start with.
Once you factor in your real estate agent's commission (around 2%), lenders mortgage insurance and stamp duty on your next place, you could have nothing left at all.
Most interest-only home loans have variable interest rates, but it's possible to get a fixed rate one. With these loans, you know exactly how much your interest-only repayments will be each month during the fixed period.
The downside? Fixed rate loans are typically higher than variable rate loans. And interest-only rates are higher than principal-and-interest rates. So you're looking at a very high interest rate compared to most loans.
Most lenders allow you to make interest-only repayments for up to 5 years. Some lenders allow it for up to 10 years, but it really depends on your loan and financial circumstances.
These home loans offer low costs, coupled with a host of features, giving the best overall value.
7+
Great
These home loans may have slightly higher interest rates or fewer features but overall, a competitive offering.
5+
Standard
Usually the home loans would offer above average rates. They may still include some competitive features.
0+
Basic
Higher costs and/or fewer features.
What is Finder Score?
The Finder Score crunches 7,000 home loans across 120+ lenders. It takes into account the product's interest rate, fees and features, as well as the type of loan eg investor, variable, fixed rate - this gives you a simple score out of 10.
To provide a Score, we compare like-for-like loans. So if you're comparing the best home loans for cashback, you can see how each home loan stacks up against other home loans with the same borrower type, rate type and repayment type. We also take into consideration the amount of cashback offered when calculating the Score so you can tell if it's really worth it.
Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University.
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We are paying 10% on a 250k interest only loan to a private financier on our rural property. We would like a better cheaper option. Pls contact me with a better solution.
Finder
RebeccaSeptember 10, 2022Finder
Hi Colin,
You can compare lenders listed on this page that offer better rates. It may also be worthwhile consulting a mortgage broker to talk through your specific needs and help match you up to a lender that suits your circumstances.
Kind regards,
Rebecca
Finder
RichardSeptember 7, 2022Finder
Hello Colin,
In a situation like yours, you might need to speak to a local mortgage broker. They can help you find a suitable rural loan if you can’t find anything yourself.
I hope this helps.
Richard
AlanJune 15, 2019
How likely is it that our lender would consider interest only on our mortgage which is 5.4% interest and we are finding it difficult to pay the high repayments and/or reduce the rate to a more reasonable rate? Would a mortgage moratorium be useful to us as we will need some breathing space before we sell if rates could not be negotiated down?
Finder
JeniJune 16, 2019Finder
Hi Alan,
Thank you for getting in touch with Finder.
Since the moratorium is a grace period of sorts after the loan amount has been disbursed to the borrower, I suggest that you discuss your possible options with your current lender. Now, if you’re unhappy with what they’ve provided, please seek help from a mortgage broker for your other options.
I hope this helps.
Thank you and have a wonderful day!
Cheers,
Jeni
SamuelDecember 21, 2018
I have a interest only loan on an investment property. The bank wants now to revert to interest and principle. This doesn’t suit me. I would like to refinance to an interest only loan with an off-set account or redraw facility.
Finder
MayDecember 21, 2018Finder
Hi Samuel,
Thanks for getting in touch.
I’m sorry to hear about the change in your home loan. If the principal and interest type of loan does not suit you, best to communicate this with your lender so they can offer other options for you. In case they will insist on the P&I on your mortgage, you can go ahead and refinance. There are home loan refinancing options you can choose from. Brands listed on the page also offer P&I, but of course, you can contact the lender first to discuss your option for interest-only with offset and redraw facility.
Alternatively, best to speak to a mortgage broker who can consider your circumstance and offer you a wide range of refinancing options.
Hope this has helped.
Cheers,
May
MarishaSeptember 28, 2018
i want interest only as later lookin at selling and buying retirement villa house worth 750 or so hsve 150 mortgage 1 credit card maxed to 2thousamd and 1 6 tjousand who can help me find interest only home loan in wa
Finder
JoshuaSeptember 30, 2018Finder
Hi Marisha,
Thanks for getting in touch with finder. I hope all is well with you. :)
We do have a list of interest-only home loans on this page. Check the table above and compare your options. Once you found the right for you, click on the “Go to site” green button. Please review the criteria, details of the loan product, and its conditions, then contact the lender directly to discuss your loan options and eligibility. These providers should be able to help you even if you live in WA.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
Have a wonderful day!
Cheers,
Joshua
MarcSeptember 18, 2017
What is your best investment comparison rate interest only for loan of 1.14 million thanks
Finder
RenchSeptember 20, 2017Finder
Hi Marc,
Thanks for your inquiry.
You may refer to our interest-only investment loans comparison table to compare and view the rates of different lenders. Simply enter the $1,140,000 next to the borrowing about followed by your loan term then press “Calculate”.
You may then compare each lender based on their interest rate p.a., comp rate p.a, fees, maximum LVR, and your projected monthly repayment. If you like to see the side-by-side comparison between brands, just click the “compare box” below the brand’s logo.
Please click the name of the lender or the “More info” link to be redirected to our review page and learn more about the lender’s loan offer, rates, and requirements as well as the pros and cons of using their loan service. When you are ready, you may then click on the “Go to site” button and you will be redirected to the lender’s website where you can proceed with the application or get in touch with their representatives for further inquiries you may have.
Before applying, please ensure that you meet all the eligibility criteria and read through the details of the needed requirements as well as the relevant Product Disclosure Statements/Terms and Conditions when comparing your options before making a decision on whether it is right for you. You can also contact the provider if you have specific questions. Alternatively, you can speak to a mortgage broker who can take your personal circumstance into account and offer you a range of borrowing options.
If you aren’t paying attention to when your interest-only period ends, you could find yourself facing higher repayments or a shorter loan term.
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We are paying 10% on a 250k interest only loan to a private financier on our rural property. We would like a better cheaper option. Pls contact me with a better solution.
Hi Colin,
You can compare lenders listed on this page that offer better rates. It may also be worthwhile consulting a mortgage broker to talk through your specific needs and help match you up to a lender that suits your circumstances.
Kind regards,
Rebecca
Hello Colin,
In a situation like yours, you might need to speak to a local mortgage broker. They can help you find a suitable rural loan if you can’t find anything yourself.
I hope this helps.
Richard
How likely is it that our lender would consider interest only on our mortgage which is 5.4% interest and we are finding it difficult to pay the high repayments and/or reduce the rate to a more reasonable rate? Would a mortgage moratorium be useful to us as we will need some breathing space before we sell if rates could not be negotiated down?
Hi Alan,
Thank you for getting in touch with Finder.
Since the moratorium is a grace period of sorts after the loan amount has been disbursed to the borrower, I suggest that you discuss your possible options with your current lender. Now, if you’re unhappy with what they’ve provided, please seek help from a mortgage broker for your other options.
I hope this helps.
Thank you and have a wonderful day!
Cheers,
Jeni
I have a interest only loan on an investment property. The bank wants now to revert to interest and principle. This doesn’t suit me. I would like to refinance to an interest only loan with an off-set account or redraw facility.
Hi Samuel,
Thanks for getting in touch.
I’m sorry to hear about the change in your home loan. If the principal and interest type of loan does not suit you, best to communicate this with your lender so they can offer other options for you. In case they will insist on the P&I on your mortgage, you can go ahead and refinance. There are home loan refinancing options you can choose from. Brands listed on the page also offer P&I, but of course, you can contact the lender first to discuss your option for interest-only with offset and redraw facility.
Alternatively, best to speak to a mortgage broker who can consider your circumstance and offer you a wide range of refinancing options.
Hope this has helped.
Cheers,
May
i want interest only as later lookin at selling and buying retirement villa house worth 750 or so hsve 150 mortgage 1 credit card maxed to 2thousamd and 1 6 tjousand who can help me find interest only home loan in wa
Hi Marisha,
Thanks for getting in touch with finder. I hope all is well with you. :)
We do have a list of interest-only home loans on this page. Check the table above and compare your options. Once you found the right for you, click on the “Go to site” green button. Please review the criteria, details of the loan product, and its conditions, then contact the lender directly to discuss your loan options and eligibility. These providers should be able to help you even if you live in WA.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
Have a wonderful day!
Cheers,
Joshua
What is your best investment comparison rate interest only for loan of 1.14 million thanks
Hi Marc,
Thanks for your inquiry.
You may refer to our interest-only investment loans comparison table to compare and view the rates of different lenders. Simply enter the $1,140,000 next to the borrowing about followed by your loan term then press “Calculate”.
You may then compare each lender based on their interest rate p.a., comp rate p.a, fees, maximum LVR, and your projected monthly repayment. If you like to see the side-by-side comparison between brands, just click the “compare box” below the brand’s logo.
Please click the name of the lender or the “More info” link to be redirected to our review page and learn more about the lender’s loan offer, rates, and requirements as well as the pros and cons of using their loan service. When you are ready, you may then click on the “Go to site” button and you will be redirected to the lender’s website where you can proceed with the application or get in touch with their representatives for further inquiries you may have.
Before applying, please ensure that you meet all the eligibility criteria and read through the details of the needed requirements as well as the relevant Product Disclosure Statements/Terms and Conditions when comparing your options before making a decision on whether it is right for you. You can also contact the provider if you have specific questions. Alternatively, you can speak to a mortgage broker who can take your personal circumstance into account and offer you a range of borrowing options.
Cheers,
Rench