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Interest only home loans start with very cheap repayments. But you're not actually paying off the loan and your repayments will end up higher later on, costing you more in the end. But that doesn't mean interest only loans are a bad idea. They're a popular option for investors trying to minimise their loan repayments while maximising their tax-deductible expenses (more on that later).
Even home owners find these loans useful if they need to reduce their repayments for a short time. You just need to make sure the loan suits your goals and prepare for the higher repayments later.
After entering your details a mortgage broker from Aussie will call you. They will discuss your situation and help you find a suitable loan.
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There are two components to a home loan repayment, the principal and the interest:
With those two concepts explained we can now talk about the two home loan repayment types, principal and interest home loans and interest only home loans.
Most home loans have principal and interest repayments. With these loans you repay the loan principal and some interest at the same time. The lender calculates these repayments in such a way that you pay more interest at the start and over time the amount of principal you repay increases until the debt is repaid. This is called an amortisation schedule.
With an interest only loan you just repay the interest on top, not the money you've borrowed. At first. When the loan reverts to principal and interest repayments, you have to repay both the principal and the interest together.
This means interest only loans start with much lower repayments. But over time they cost you more because you have to pay more interest to make up for the lower repayments at the start.
They can be risky because the principal is the main part of the loan. If you're not repaying the principal, you're not really owning more of your home and building home equity. You're essentially borrowing money without actually paying it back (until you start paying off the principal).
Let's compare two otherwise identical loans, one with principal and interest payments, the other with interest only repayments for the first two years.
Details | Principal and interest | Interest only |
---|---|---|
Loan amount | $500,000 | $500,000 |
Loan term | 30 years | 30 years |
Interest rate | 2.70% | 2.70% |
Interest only period | N/A | 2 years |
Monthly repayments | $2,027 | $1,125 (during interest only period) $2,122 (after interest only period) |
Total loan cost over 30 years | $730,075 | $740,126 |
Difference in cost | $10,051 cheaper | $10,051 more expensive |
In the scenarios above opting for interest only repayments for two years will cost you $10,051 extra in interest.
If you prefer to understand tricky financial concepts visually, here's an infographic breaking down two borrowers with different interest only loans and one borrower with a principal and interest loan. As you can see, the longer your interest only period is the more interest you pay in the end.
But the risks of interest only loans can't be ignored:
For the well-informed, well-organised borrower an interest only loan can work well. But if you don't know what you're doing it can get messy.
Learn more about the pros and cons of interest only loans
Every individual borrower has their own reasons for choosing a certain type of loan. But there are certain types of borrower who have the most to benefit from interest only repayments.
Read more about how investors can make use of interest only mortgages.
Imagine you bought an investment property in 2016. For three years you made interest only repayments. You had trouble renting it out, but you were waiting for the property to grow in value.
But the market slowed and your property lost value. Then your loan reverted to principal and interest.
Now your repayments are much higher and your property is worth less. You haven't paid off any of your loan and if you sell you'll still be in debt.
This is the worst outcome of having an interest only loan. Most borrowers won't find themselves in this situation, but it's important to understand the possible risks.
Every borrower wants the best home loan. And it's a complex question. You can read our full best home loans guide if you want some tips for getting the best deal possible.
And it's important to remember that the best loan looks different for every borrower. It depends on your financial situation, your goals, your spending habits and your appetite for risk (or desire for certainty). There are also more factors such as the interest rate (the lower the better) and fees (the fewer and lower the better).
All of this is especially true for interest only loans, which are more complicated and potentially riskier than principal and interest loans. Here's what you need to do to find the best interest only home loan for you:
Borrowers with interest only loans need to pay careful attention to their home loan. To help you stay on top of your mortgage, here are some tips.
No interest only loan remains an interest only loan forever. It eventually must revert to a principal and interest loan. Otherwise you'd never repay it.
You need to understand how long your interest only period lasts for. It could be two years or it could be four. 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.
Note that your interest rate will change when the interest only period ends. Fortunately, it should go down because principal and interest loans have lower rates in almost all cases.
Check your new rate anyway when the time comes. If it's not competitive you should consider refinancing to a better deal if you can.
One way to get ahead on your interest only home loan is to make extra repayments on top of the monthly minimum your lender charges you. Now, you can only do this if your loan allows for extra repayments (if you have a fixed rate loan you might not be able to).
You could try slowly repaying more than the minimum amount each month and slowly build up to the full amount you'll be paying once you switch to principal and interest repayments. This will take away the sudden shock of having your repayments increase massively.
If you're a property investor trying to minimise your non-tax-deductible costs then making extra repayments probably isn't the best use of your money. You might be better off repaying your owner-occupier home loan if you have one or putting the money in an offset account.
A mortgage broker can answer tricky loan questions and help you structure your interest only loan in the way that works best for you.
They can offer you some tips for staying on top of your interest only loan too.
APRA's limits on interest only lending have been lifted, but lenders are still careful when assessing interest only borrowers.
Maximise the chances of getting your application approved by:
The good and bad of interest-only repayment periods, explained.
Why do so many investors take our interest-only home loans? Discover the advantages and apply for a mortgage in seconds.
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.
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 this change on your home loan. Well, 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 the P&I on your mortgage, you can go ahead and refinance. There are home loan refinancing options on this page where you can compare. 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. 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
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