Compare options and consider whether an interest-only loan could be right for you
Standard home loans have repayments that include both the interest and a small proportion of the principal. If you remove this principal portion from the equation, you can reduce the amount you make in repayments each month. This can be an option to consider for some borrowers, including investors and those building a property, but it should be noted that making interest-only payments doesn't reduce your loan amount, so care should be taken when using an interest-only loan.
Some of the loans below feature interest-only repayments. The rate advertised might not be reflective of the interest-only rate.
Interest-only home loans comparison
Rates last updated June 24th, 2017.
Jodie
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Interest-only home loans explained
Here the industry experts (listed below) share some thoughts around interest-only loans:
- Kim Wight | Sydney Mortgage Broker
- Neil Manuel | Former eMoney General Manager
Click here for video transcript:
- START
Carla Baldock: An interest-only loan is where your monthly repayments only pay back the interest on the loan that you've taken out. So, in other words, at the end of the loan, home loan period, typically 30 years, your balance of your home loan is still due. All you've paid is the interest on
your loan.
Stuart Tucker: Interest-only loans are often used sometimes for investors, who just want to be able to measure the interest component of that loan, and also for people in the early term of their, say 25 year loan period, just to give them a kick start, and then after a period of time, start paying down principal and interest.
Kim Wight: With interest-only loans, they're predominantly for the investor, because when people are buying an investment property, they're doing it (1) for capital growth, and (2) for being able to get a tax advantage in negative gearing. And the only, the portion that is a tax advantage is the interest rate.
Neil Manuel: So the main benefit of an interest-only loan is that the balance actually doesn't get reduced. You're only paying the monthly interest on a loan. Why is that important, is because on an investment property, you can claim more back from your interest payments when the balance of the loan is actually higher. So the lower you bring the balance down, the less you are able to claim back, because you're being charged less interest.
- END
About interest-only loans
Interest-only home loans are loans that only require you to pay the interest portion of the repayments. This means you pay less each month than a regular principal and interest loan.
For many, it’s an option that requires financial discipline and looking for a short term solution.
"When we recommend an interest-only, variable rate product, we are referring to the minimum repayment amount as the interest component," says Andrew Tan, co-founder of Masters Broker Group*. "Care needs to be taken, and it is important that borrowers understand the key difference between a principal and interest repayment and an interest-only repayment. A borrower making an interest-only repayment must not develop the mindset that they are meeting their entire borrowing commitments, as no principal repayments have been made."
Who are interest-only loans suited to?
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.
According to Mr Tan, borrowers that are good with money could benefit from the flexibility that an interest-only loan could provide because it "allows the borrower to pay more than the interest, allowing the borrower to make principal repayments even when the loan is interest-only. This is great to manage cash flow and provides options for the borrower".
There are also other perks associated with an interest-only loan if you have the right financial advice.
"When used with tax planning, the borrower can keep the repayments on an investment loan at the minimum amount, and direct additional funds to non-tax deductible borrowings, like a home loan," explains Mr Tan.
Why you need to be aware of when your interest only period ends
What's the best interest-only home loan?
There's no one best interest-only home loan, as our circumstances are all different. There are different ways you can find out if a home loan is the right one for you. These include comparing one or more of the following:
- 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.
What are the risks of interest-only loans?
Industry experts reveal the risks of interest-only home loans.
Andrew Tan
Co-founder, Masters Broker Group
The risk is that borrowers fall into the trap of only making the interest repayment, with no strategy of paying any of the principal off. This may happen when borrowers take out a line of credit mortgage where the minimum repayment is the interest-only.
In a standard term loan, when the interest-only period ends, borrowers also need to budget for the additional repayment as they switch from interest-only to principal and interest.
Jessica Darnbrough
Head of Corporate Affairs, Mortgage Choice
While there are many benefits/advantages associated with having an interest-only loan, there are also some disadvantages attached to this particular product. For owner occupiers the biggest disadvantage associated with an interest-only loan is that it stops you from making any headway on your overall mortgage debt.
As the name would suggest, with an interest-only loan you are only repaying the interest charged on your loan. In other words, you are not actually paying off your debt.
While interest-only loans are popular with investors because they allow them to minimise their mortgage repayments and increase their tax advantages, it is generally a good idea for owner occupiers to have a principal and interest home loan product because it ensures they pay off their non-tax deductible debt.
That said, there will always be instances where interest-only loans are appropriate for owner occupiers. These instances can include home renovations or career changes, where the owner occupier needs to free up some of their cash.
Key points to consider
- Another consideration of this loan type is if the borrower has continued to make the minimum interest-only repayments and hence not contributed anything towards the principal loan amount, they will not have built up any equity to access for other means, unless the property has increased in value.
- Interest-only loans are popular among investors. This is generally because the interest on a loan may be tax deductible depending on your personal situation. As the interest on an owner-occupied property loan is not tax deductible, it’s generally better to pay this down as quickly as possible. In saying this though, there are cases where interest-only loans for owner-occupied properties may be appropriate as part of an overall financial strategy, for example when using the extra funds elsewhere such as paying down more expensive debts, or using the funds for renovations instead of borrowing additional money.
- The main risk of an interest-only loan is that you are not required to make any repayments on the principal loan amount. Over the long term, the balance of the loan will remain high and as a result, the interest requirements will be higher.
Connect with Stuart: view his blog
Should I split my interest-only home loan?
A split rate home loan will see your home loan split into different portions. These portions can be fixed for different periods of time like a regular fixed rate home loan or left as variable rates. The benefit of this is that you can get some of the advantage of a variable rate home loan, such as interest rates which can decrease over the course of a year, with some of the advantages of a fixed rate home loan, like protecting yourself from rising rates.
Note that some home loans will only allow for two splits e.g they allow you to split the loan into two portions. Others allow you to split your loan into as many as five or even six portions.
Interest-only home loans pros and cons
As mentioned above, there are a few considerations involved with interest rates, and a number of advantages.
Advantages
- 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.
Considerations
- 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. Also, if interest rates rise you could be paying more for the same value property.
1) Can i get 5 years interest only loans for construction of house & Land packages for Residential homes for investment purposes.
2) Also what is the best rate for this type of loan
Hi Michael,
Thanks for your question.
Interest-only periods generally last for 5 years and you can use them for owner-occupier of investment purposes.
In the above page, the lowest comparison rate that I can see is 3.72%. Kindly note that the comparison rate takes into account some of the fees and charges of a home loan to give you a more accurate representation of a loan’s interest rate once the costs are taken into account.
If you need assistance in finding the best option for your situation, you may also get in touch with a mortgage broker by filling out our online form above.
Cheers,
Anndy
With interest only loans, can you make lump sum payment (for example if you inherited some money) into the loan to reduce the monthly interest payments or do the interest only payments relate to the loan amount for a fixed term?
Hi Tom,
Thank you for your question and for contacting finder.com.au – we are a financial comparison website and general information service we are not mortgage specialists so can only offer general advice.
That would depend on the lender you go with and the term of payments you have with them. So it’s best that you contact the lender directly to confirm if you can make a lump sum payment and how they would treat such payment.
Cheers,
May
Can a line of credit account be secured against anything else but a home mortgage, e.g. secured against your super fund?
Hi Lynda,
Thank you for contacting finder.com.au, a financial comparison website.
There are line of credit loans available as a personal loan rather than a home loan, please visit this page to find out more, in terms of home loans it would be best to speak to a lender directly as they each have their own lending criteria.
There is a selection of line of credit home loans available from different lenders that you can contact to discuss your needs.
Regards
Jodie
do you have interest only home loans
Hi Rosemary,
thanks for the question.
This page compares a range of interest only home loans which you can enquire with the lender directly for more information.
Cheers,
Marc.
I’d like to know the best interest rate for interest only loan, for a period of 3 years. Cheers.
Hi Antonio,
Thank you for your question.
You have come through to finder.com.au, a financial comparison website, please use the above table with your loan details to see what current interest rates are offered for a 3 year fixed rate loan of the amount you are wanting to borrow.
Regards
Jodie
If I have an interest only fixed rate loan and make a manual payment into it, will my next interest payment factor in this manual payment?
Ie. Say in month one my IO payment is approx $800
In month four I make a manual payment of $500. Will my next IO payment be approx $300 or approx $800?
Hi Claire,
Thanks for your enquiry.
As finder.com.au is an online comparison service, we cannot comment on the value of your interest-only payments.
It would be best to contact your lender directly.
Thanks,
Belinda
looking for an int only off set loan a/c, refinance amount 310000
Reply
Hi Sandy,
thanks for the question.
We’ve compiled some interest only home loans with offset accounts on this page, so it might be a good idea to compare the loans on this page and contact a lender directly to find out more about a loan or to start an application.
I hope this helps,
Marc.
looking for an int only off set loan a/c, refinance amount 310000
Hi Sandy,
Thanks for your question.
Please see this page for a comparison of home loans that offer interest only repayments with an offset account. Remember to check the minimum loan amount before committing to anything.
Cheers,
Shirley
I have 150,000 and would like to purchase land and build a home in an area near shops and train near where I live now.
I have 10,000 on my home loan that i will pay off. I gross 1997.69 per fortnight and have no other loans. The home that I now live I will be selling in around five or six years as I am 59 and will retire. My property is worth around one million or more and would like a interest only loan with options such as, to pay more off the loan, and redraw function. I do not wont my home as Collateral. Regards Julie.
Hi Julie,
thanks for the question.
One option you have is to compare home loans on this page and if you’re interested in any of them click the ‘Go to Site’ button to speak to a lender and find out more. You can also contact a mortgage broker if you’d like advice and help to obtain a home loan by clicking the ‘speak to a mortgage broker’ button in the table above.
I hope this helps,
Marc.
have seen a place that i like but haven’t sold mine as yet I own my home and want to know if itis a viable option to borrow on the new house and pay a interest only until my property has been sold.
Hi Here we go again,
thanks for the question.
Whether or not you’ll be able to do this will depend on the lender you apply with, as each has their own unique lending criteria. You might also want to check out the different bridging loans available, as these can be used to pay for one property while waiting for another to sell.
I hope this helps,
Marc.