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Compare interest-only home loans

Interest-only home loans reduce your mortgage repayments early on, but you will pay the interest back later.

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By

Richard Whitten

Edited by

David Gregory

Updated

Fact checked
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1 - 11 of 11
Updated regularly
Name Interest Rate p.a. Comparison Rate p.a. Fees Monthly Payment
Westpac Flexi First Option Home Loan
Interest only20% min. depositInvestment
Interest Rate
7.24%
Comparison Rate
7.56%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$1,024
More Info
St.George Basic Variable Rate Home Loan
Interest only10% min. depositInvestment
Interest Rate
7.19%
Comparison Rate
7.20%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$1,018
More Info
ING Mortgage Simplifier Home Loan
Interest only20% min. depositOwner-occupier$1M+
Interest Rate
6.64%
Comparison Rate
6.38%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$963
More Info
Athena Power Up Variable Home Loan
Interest only40% min. depositInvestmentOffset account
Interest Rate
6.69%
Comparison Rate
6.59%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$968
More Info
Gateway Bank Low Rate Essentials Variable Rate Home Loan
Interest only20% min. depositInvestment
Interest Rate
6.68%
Comparison Rate
6.70%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$967
More Info
Athena Straight Up Variable Home Loan
Interest only30% min. depositInvestment
Interest Rate
6.59%
Comparison Rate
6.48%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$958
More Info
Easy Street Smart Variable Home Loan
Interest only5% min. depositOwner-occupierOffset account
Interest Rate
6.49%
Comparison Rate
6.27%
Fees
Application: $500
Ongoing: $0 p.a.
Monthly Payment
$948
More Info
Aussie Select Basic Variable
Interest only20% min. depositInvestment
Interest Rate
6.49%
Comparison Rate
6.50%
Fees
Application: $330
Ongoing: $0 p.a.
Monthly Payment
$948
More Info
Bank Australia Basic Variable Home Loan
Interest only40% min. depositInvestment
Interest Rate
6.54%
Comparison Rate
6.47%
Fees
Application: $595
Ongoing: $0 p.a.
Monthly Payment
$953
More Info
HSBC Home Value Loan
Interest only20% min. depositOwner-occupier
Interest Rate
6.59%
Comparison Rate
6.23%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$958
More Info
Tiimely Own Investor Interest Only Variable Rate Home Loan
5Y Interest only10% min. depositInvestment
Interest Rate
6.64%
Comparison Rate
6.44%
Fees
Application: $0
Ongoing: $0 p.a.
Monthly Payment
$963
More Info
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What is an interest-only home loan?

With an interest-only home loan, you don't repay the money you've borrowed at first. You just pay the interest charges. This makes your repayments much smaller, but only during the interest-only period.

Most Australians have 30-year home loans. But an interest-only period typically lasts between 1 and 5 years. Then the loan reverts to a principal-and-interest loan.

That's when your repayments get bigger. Now you're paying off the money you've borrowed plus all the interest.

How interest-only loans work

There are 2 parts to any home loan repayment: the principal and the interest.

Most Australian borrowers choose principal-and-interest home loans. They borrow money and pay it back, plus interest at the same time.

Bag of money

Principal

The principal is the money you borrow from the lender. It's also called the loan amount. This is the money you have to repay.

Percentage

Interest

Interest is charged by the lender as a percentage of the money you've borrowed (the principal). The amount of interest charged depends on the loan's interest rate.

But by choosing an interest-only period, you can temporarily delay repaying the principal. But your lender will charge you more for this. You'll have a higher interest rate and your repayments will increase once you're back on principal-and-interest repayments.

Here's a quick example using 2 home loans that are identical except for the repayments.

Interest-only loans end up more expensive over time

DetailsPrincipal-and-interestInterest-only
Loan amount$500,000$500,000
Loan term30 years30 years
Interest rate5.50%5.50%
Interest-only periodN/A2 years
Monthly repayments$2,839$2,292 (during interest-only period)
$2,920 (after interest-only period)
Total loan cost over 30 years$1,022,021$1,036,063
Difference in cost$14,042 cheaper$14,042 more expensive

In the scenarios above, opting for interest-only repayments for 2 years will cost you $14,042 extra in interest.

But this is just a simple hypothetical. In reality, interest-only loans have higher interest rates, so you'd likely pay slightly more.

What are the benefits of interest-only loans?

There are 2 major reasons borrowers choose interest-only home loans even though they cost more in the long run.

You get cheaper repayments right now

While principal-and-interest repayments save you money in the long term, some borrowers need a break right now. In this case, interest-only repayments give you some breathing space.

It's a short-term strategy, but if you've lost your job or are dealing with unexpected expenses, interest-only repayments can be a lifesaver.

Investors get tax benefits

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. 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.

What are the risks with these loans?

There's nothing wrong with an interest-only loan. You just need to be aware of the potential risks and understand exactly what you're getting yourself into.

Interest-only repayments cost you more

Delaying the repayment of money you've borrowed winds up costing you more. By not paying off the loan principal from day one, you get charged more interest over the life of the loan.

Interest-only loans also have higher rates than principal-and-interest loans.

Interest-only rate update: November 2023

The average variable interest rate with principal-and-interest repayments is:

6.50%

But the average variable interest rate with interest-only repayments is:

7.04%

This is a difference of 54 basis points.

Source: Finder's database, November 2023

You don't build equity with interest-only repayments

If your property doesn't grow in value, you won't build any equity in your home if you're not repaying any of the principal. This means from the day you move into the property, you don't own any more of it than the amount you paid for a deposit.

You could even end up in negative equity if the property loses value.

Worst case scenario: Interest-only loan and falling property prices

Imagine you bought an investment property in a small mining town. For 3 years, you made interest-only repayments.

You had trouble renting it out because the town's mine closed. And the property market slowed. Your property has actually lost value and there are no interested buyers.

Then your loan reverted to principal-and-interest repayments.

Now your repayments are much higher, but your property is worth less. You haven't paid off any of your loan. You're in a worse position than when you started. Most borrowers won't find themselves in this situation, but it's important to understand the possible risks.

How to compare interest-only home loans

Here's what you need to do to find the best interest-only home loan for you:

  • Compare and get a low rate loan. Interest-only loans have higher rates, so it's very important to find a more competitive mortgage.
  • Find a loan with 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.

Is it harder to get an interest-only home loan?

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.

Detailed guide to home loan applications

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:

  1. 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.
  2. 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.
  3. 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

  1. Finder's database, accessed 8 November 2023

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35 Responses

    Default Gravatar
    ColinSeptember 2, 2022

    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.

    Reply
      AvatarFinder
      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

      Reply
      AvatarFinder
      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

      Reply
    Default Gravatar
    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?

    Reply
      AvatarFinder
      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

      Reply
    Default Gravatar
    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.

    Reply
      AvatarFinder
      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

      Reply
    Default Gravatar
    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

    Reply
      AvatarFinder
      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

      Reply
    Default Gravatar
    MarcSeptember 18, 2017

    What is your best investment comparison rate interest only for loan of 1.14 million thanks

    Reply
      AvatarFinder
      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.

      Cheers,
      Rench

      Reply
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