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 December 2025 is 5.09%. But the average interest-only rate is 6.90%.
In comparison, the average variable interest rate for a principal and interest owner occupier loan is 6.28%.
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.
Best interest-only home loans in December 2025
These home loans are the best interest-only home loans based on their Finder Scores this month.
Lender
Loan product
Interest rate
Finder Score
Newcastle Permanent Premium Plus Package Fixed Rate - 2 year fixed special (Investor)
First Home Loan - Variable LVR 98% (Owner Occupier)
5.29% p.a
9.9
Police Bank
First Home Loan - Variable LVR 98% (Owner Occupier)
5.09% p.a
9.9
Border Bank
First Variable Home Loan - LVR 80% to 98% (Owner Occupier)
5.09% p.a
9.9
BankVic
Fixed Home Loan - 3 Year (Investor)
5.38% p.a
9.8
The Mutual Bank
Package Fixed Home Loan - 3 Year (Investor)
5.04% p.a
9.8
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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Interest-only home loans usually last for a maximum of five to ten years, after which the loan generally reverts back to principal and interest payments. Of course this will depend upon the exact loan product.
I hope this helps,
Marc.
DisabledSeptember 9, 2013
Hi,
I am enquiring about the availability of a fixed interest mortgage loan which would enable me to consolidate my $100,000 Veridian loan on my $325,000 property and a $25,000 credit card which has accumulated since I had to stop work suffering from rapid moving Osteoarthritis.
My disability pension is $808.40 per fortnight; I own my car, all furnishings & have no other debt.
I have outgoings of $165 per month for rates & water, $106 pm electricity, $130 pm phone, $50 pm fuel, $96 pm Insurances, $200 pm groceries, $50 pm entertainment, $150 pm extras & approx $800 pm interest on loan & credit card
I am currently paying 6.050% on my veridian loan and 12.99% on the credit card and would greatly appreciate it if someone could steer me in the right direction to consolidate these loans and perhaps enable me to hang onto my home whilst getting both hips & knees replaced &
then hopefully I can return to work part time mid next year, I would greatly appreciate it.
Thank you kindly :).
Finder
MarcSeptember 10, 2013Finder
Hi,
Thanks for the question.
You may consider refinancing your home loan to consolidate your mortgage and credit card debts. 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.
I also recommend getting in touch with a licensed mortgage broker. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that is more inclined to review your application.
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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how long does an interest only loan last for
Hello Sharon,
thanks for the question.
Interest-only home loans usually last for a maximum of five to ten years, after which the loan generally reverts back to principal and interest payments. Of course this will depend upon the exact loan product.
I hope this helps,
Marc.
Hi,
I am enquiring about the availability of a fixed interest mortgage loan which would enable me to consolidate my $100,000 Veridian loan on my $325,000 property and a $25,000 credit card which has accumulated since I had to stop work suffering from rapid moving Osteoarthritis.
My disability pension is $808.40 per fortnight; I own my car, all furnishings & have no other debt.
I have outgoings of $165 per month for rates & water, $106 pm electricity, $130 pm phone, $50 pm fuel, $96 pm Insurances, $200 pm groceries, $50 pm entertainment, $150 pm extras & approx $800 pm interest on loan & credit card
I am currently paying 6.050% on my veridian loan and 12.99% on the credit card and would greatly appreciate it if someone could steer me in the right direction to consolidate these loans and perhaps enable me to hang onto my home whilst getting both hips & knees replaced &
then hopefully I can return to work part time mid next year, I would greatly appreciate it.
Thank you kindly :).
Hi,
Thanks for the question.
You may consider refinancing your home loan to consolidate your mortgage and credit card debts. 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.
I also recommend getting in touch with a licensed mortgage broker. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that is more inclined to review your application.
I hope this helps,
Marc