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.
State Custodians Low Rate Home Loan
State Custodians Low Rate Home Loan with Offset - LVR up to 80% (Owner Occupier, IO)
variable rate
comparison rate
State Custodians Low Rate Home Loan
The State Custodians Low Rate Home Loan is a variable rate loan with 100% offset account and no application or ongoing fees.
- Interest rate of 4.09% p.a.
- Comparison rate of 4.12% p.a.
- Application fee of $0
- Maximum LVR: 80%
- Minimum borrowing: $100,000
- Max borrowing: $2,000,000
UBank UHomeLoan Variable
UBank UHomeLoan Variable Rate - Standard Variable Rate (Investor with Investor Offer Interest Only)
variable rate
comparison rate
UBank UHomeLoan Variable
Enjoy the low variable interest rate with no application or ongoing fees.
- Interest rate of 4.44% p.a.
- Comparison rate of 4.44% p.a.
- Application fee of $0
- Maximum LVR: 80%
- Minimum borrowing: $100,000
- Max borrowing: $2,000,000
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How can this page help?
How do interest-only home loans work?
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.
Watch: Interest-only home loans explained
Hear the industry experts (listed below) share some thoughts around interest-only loans:
Can I still get an interest-only home loan?
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.
Why would I want an interest-only home loan?
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.
What are the pros and cons of interest-only loans?
Pros
- 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.
Cons
- 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.
What do the experts say about 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. For owner occupiers the biggest disadvantage with an interest-only loan is that it stops you from making any headway on your overall mortgage 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.
Stuart Pullar
Principal of Mortgage Choice, Ashgrove
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, 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.
Connect with Stuart: view his blog
How can I find the best interest-only home loan?
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.
I have a few more questions about interest-only loans
Should I split my interest-only home loan?
Note that some home loans will only allow for two splits. Others allow you to split your loan into as many as five or even six portions.
My lender is raising rates: can I refinance my interest-only loan?
It's always a good idea to consider refinancing if you can get a better rate. If you have an interest-only loan but aren't investing (and don't need the extra cash) it's probably a good idea to switch to a principal and interest loan so you can start reducing your mortgage debt. This is only general advice and the right decision will depend on your financial goals and circumstances.
Can a mortgage broker help me?
If you're looking for an interest-only loan a mortgage broker might be able to help. Experts at finding loans for all types of situations, a mortgage broker might be the person to help get an increasingly hard to find interest-only loan.
What is your best investment comparison rate interest only for loan of 1.14 million thanks
Hi Marc,
Thanks for your inquiry. Please note that we are not affiliated with any company we feature on our site and so we can only offer you general advice.
Unfortunately, we can’t actually recommend a specific provider or say what is best. You can also have a look on this page to compare your options and see more info.
Cheers,
Rench
Can I borrow moneys?
Hi Kyaw Koko,
Thanks for your inquiry.
Compare a wide range of loans on this page. If you’re after a specific type of loan, check out our comprehensive round-ups of refinancing loans, variable rate loans, fixed rate loans or investor loans, or read on to learn more about how loans work, what the fees are and how to minimise , how to get pre-approval, how to choose a lender and other key topics.
Hope this information helped.
Cheers,
Arnold
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