Interest-only investment loans January 2021

Discover why so many investors turn to interest-only loans instead of principal and interest, then compare the most competitive loan offers for landlords right now.

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This article was fact-checked and reviewed by Cam McLellan, a property investment specialist whose book, My four-year-old the property investor, has sold more than 100,000 copies. Content has been updated for 2021.

As a property investor, getting an interest-only investment loan can help you build your wealth while minimising your costs. Learn how these loans work and, just as importantly, how to use them in your favour. On this page you can review the risks of interest-only loans, learn why investors choose these loans over principal and interest mortgages and compare the most competitive interest-only deals in the market.

UBank UHomeLoan - 1 Year Fixed Rate (Investor, IO)

2.29 % p.a.

fixed rate

2.72 % p.a.

comparison rate

UBank Home Loan Offer

Apply for the UBank UHomeLoan - 1 Year Fixed Rate (Investor, IO) and enjoy a home loan with the ability to make extra payments, as well as split facility up to four times. You can borrow up to 80% of your home loan value.

  • Interest rate of 2.29% p.a.
  • Comparison rate of 2.72% p.a.
  • Application fee of $0
  • Maximum LVR: 80%
  • Minimum borrowing: $100,000
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Compare interest-only investment rates

The loans below have interest-only repayments. However, the repayment calculation shows principal and interest repayments. Your initial repayments will be lower.

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Credit services for Aussie Select, Aussie Activate and Aussie Elevate products are provided by AHL Investments Pty Ltd ACN 105 265 861 (“Aussie”) and its appointed credit representatives, Australian Credit Licence 246786. Credit for Aussie Select products is provided by Residential Mortgage Group Pty Ltd ACN 152 378 133, Australian Credit Licence 414133 (“RMG”). RMG is a wholly-owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian Credit Licence 234945. Credit for Aussie Activate products is provided by Pepper Finance Corporation Limited ACN 094 317 647 (“Pepper”). Pepper Group Limited ACN 094 317 665, Australian Credit Licence 286655 acts on behalf of Pepper. Credit services for Aussie Elevate products are provided by AHL Investments Pty Ltd ACN 105 265 861 Australian Credit Licence 246786 (“Aussie”) and its appointed credit representatives. Aussie is a trade mark of AHL Investments Pty Ltd ABN 27 105 265 861. Credit and any applicable offset accounts for Aussie Elevate are issued by Bendigo and Adelaide Bank Limited ABN 11 068 049 178 AFSL / Australian Credit Licence 237879.

Aussie is a trade mark of AHL Investments Pty Ltd. Aussie is a subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124. ©2020 AHL Investments Pty Ltd ABN 27 105 265 861 Australian Credit Licence 246786.

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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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$
years
Name Product Interest Rate (p.a.) Comp. Rate^ Application Fee Ongoing Fees Max LVR Monthly Payment
UBank UHomeLoan Fixed
2.29%
2.72%
$0
$0 p.a.
80%
$577.55
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
Athena Variable Home  Loan
2.84%
2.68%
$0
$0 p.a.
80%
$620.63
A competitive interest-only investor rate with no application or ongoing fees. Requires a 20% deposit.
UBank UHomeLoan Fixed
2.64%
2.73%
$0
$0 p.a.
80%
$604.76
Forget about rate rises for 5 years and minimise repayments on your investment mortgage.
ING Orange Advantage Loan
3.14%
3.47%
$0
$299 p.a.
80%
$644.87
Get a rate discount for higher borrowing amounts, and enjoy a 100% offset account.
ANZ Breakfree Package Home Loan Fixed
2.69%
4.4%
$0
$395 p.a.
80%
$608.71
Fix your rate and make interest only payments for 3 years with this investment loan.
ING Orange Advantage Loan
3.14%
3.47%
$0
$299 p.a.
80%
$644.87
This full-featured investment loan comes with a 100% offset account and interest rate discounts.
UBank UHomeLoan Fixed
2.24%
2.64%
$0
$0 p.a.
80%
$573.72
Pay no ongoing fees on this investment loan fixed for 3 years.
Aussie Select Basic Fixed Rate Home Loan
2.84%
3.68%
$0
$0 p.a.
90%
$620.63
ANZ Breakfree Package Home Loan Fixed
2.69%
4.55%
$0
$395 p.a.
80%
$608.71
ING Fixed Rate Home Loan
2.69%
4.68%
$499
$0 p.a.
95%
$608.71
UBank UHomeLoan Variable Rate
3.14%
3.01%
$0
$0 p.a.
80%
$644.87
Pay interest only repayments with this special offer for investors.
ING Mortgage Simplifier Home Loan
3.09%
3.11%
$0
$0 p.a.
80%
$640.79
Investors can maximise their tax-effectiveness with this interest-only loan.
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What is an interest-only investment loan?

Australian home loans can be used to buy your own home or to buy a property as an investment. Most loans are principal and interest loans, meaning you borrow money and repay it, plus interest.

An interest-only investment loan is an investment mortgage that allows you to repay only the interest portion for a set period, usually up to five years. After that period you have to start repaying the money you actually borrowed, with interest charged on top.

With an interest-only investment loan your monthly repayments start smaller. Why? Because you're not repaying the money you've borrowed (the principal). You're just paying the interest on top.

It saves you money in the short term but can cost you more in the long term, because you may end up paying more interest over time. If used strategically, an interest-only investor mortgage can help you minimise your tax and mortgage repayments.

Learn more about how interest-only repayments work

What are the risks of interest-only loans?

It's a good idea to consider the risk or negatives when making any financial decision – then you're able to balance out the pros with the cons to make the right decision for you. Interest-only loans have a few possible drawbacks:

  • With interest-only loans, you won't reduce your debt during the interest-only period. At the end of the interest-only period, you'll still owe the same amount you borrowed. For instance, if you borrow $500,000 on an interest-only loan, two years later, you'll still owe $500,000 on that loan.
  • Your repayments rise significantly once your loan reverts to a principal and interest loan. This is because you now need to pay off the principal in the remaining loan term, after a period of making no headway with the overall balance. As in our previous example, if you had an interest-only loan worth $500,000 for 2 years, you would then repay the $500,000 principal (plus interest) over the remaining 28 years of the 30-year loan term. One way to get around this is to refinance the loan to a fresh 30-year term, although this means it will take you longer to own your home outright.
  • Interest-only home loans can also be risky if your property fails to increase in value. This means when the interest-only period ends, you won't have as much equity in your home as you'd have if you were chipping away at the principal with a standard principal and interest loan.

None of this means interest-only loans are inherently bad or risky. You just need to be aware of the potential downsides and make sure your investment strategy suits your loan type. Getting expert help from a mortgage broker is a good idea if you're confused about interest-only investment loans.

Why would an investor choose interest-only over a principal and interest loan?

There are several reasons why investors use interest-only investment loans:

  1. Tax minimisation
  2. Improved cash flow through negative gearing
  3. Compound growth strategy

1. Tax minimisation

Property investors can use interest-only loans to reduce their tax bill, because home loan interest is tax-deductible for investors. At the end of the financial year, you can deduct all of the interest you’ve paid on your investment property (along with a number of other tax-deductible property expenses) over the past 12 months.

Payments on the loan principal are not tax-deductible, which is why many investors favour an interest-only loan, as the extra money you would have paid towards the loan balance (in a traditional principal and interest loan) can be used elsewhere: perhaps towards another investment or to pay down your own home loan, which is not tax-deductible at all.

If you’re a property investor using an interest-only home loan, you’ll be able to deduct your entire home loan repayment from your taxes.

2. Improved cash flow

Interest-only investment home loans can be a particularly effective strategy when you factor in negative gearing, which can give you access to tax-related refunds and therefore better cash flow.

Negative gearing is a tax concession that allows you to offset any losses you make on your investment property against your personal income. For example, if your property costs you $3,000 per month to own and maintain and the rental income is $2,500, then you can claim the $500 difference on your personal tax.

This gives you what is known is better cash flow, as you can enjoy these tax refunds while you wait for the property to appreciate in value. The idea is to eventually sell the property for a capital gain, while minimising the cost of holding the property along the way; if you can keep the costs low enough, you may be able to buy more than one investment property, which allows you to compound the impact of your results. Which leads us to our next point...

3. Compound growth strategy

Some investors buy property with a high-growth strategy by choosing properties and locations they believe will grow quickly in value. Rather than holding the property for many years, renting it out and paying it off over time, these investors buy the property, minimise their repayments for a few years, then sell the property for a much greater amount than they paid.

For this strategy to work, an interest-only investment loan is essential because your repayments are much smaller at first.

A more conservative investment strategy is to buy a property, hold onto it for a long time and rent it out. Over time the value of the property will hopefully grow. With this strategy you may want to repay the loan as fast as possible using rental payments and your own money. With this strategy, a principal and interest investment loan is usually the better choice.

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Cam McLellan is a property investment specialist, the co-CEO of OpenCorp and the bestselling author of My four-year-old the property investor.

How to use your investment properties to pay off your own home

"A key to building wealth is to hold the greatest value of assets, using the least amount of your own money. This is where interest-only loans come into play, as they can free up your cash flow. You are able to use that money to hold additional properties and this provides compound growth on your asset base. You are then able to grow wealth faster.

I'll use an end goal example of someone wanting to pay their own home off in 10 years and not 30 years, which is the time it would take if they were to pay off a principal and interest loan using their job earnings only.

To pay off your own home in a third of the time, you are required to also buy two well-chosen investment properties. Let's say each investment property costs $600,000 and has 100% debt; banks won't lend at 100%, but for simplicity, we'll use these figures (in real life, your debt would be lower and so these are "worst-case" scenarios).

Remember, improved cash flow from interest-only loans, tax breaks and rental income will help you pay for most of your loan repayments. We'll assume the remaining mortgage on your home is also $600,000.

  • Investment property debt x 2 = $1.2m ($600,000 each)
  • Family home debt = $600,000
  • Total property debt = $1.8m

Well-chosen property has the potential to double in value around every 10 years. Given this, to be debt-free you need to hold the investment properties through one full growth cycle of 10 years, then sell them.

This means your two investment properties will double in value from $1.2m to $2.4m during the cycle. If you sell them at this point for $2.4m, you incur capital gains tax (CGT) on half the profit (as you held the properties for more than a year). This will cost you around $300k at the top tax bracket.

The remaining amount is $2.1m. You can now fully repay the $1.8m debt on the investment properties and your home, leaving you with $300,000 extra and a fully paid-off home. I'm sure you'll think of something to do with the extra money!"

Need expert help? Contact a mortgage broker

How do I compare interest-only investment loans?

When comparing interest-only mortgages for investment, you need to consider these factors:

  • Interest rate. A lower rate means lower repayments. It's one of the fastest ways to compare mortgages.
  • Offset account. Having an offset account lets you use additional savings to reduce your interest payments even further. Read this guide to learn more about this strategy.
  • Flexibility. A loan with low fees (especially discharge and switching fees) makes it easier to refinance your mortgage when the interest-only period ends. And why pay more in fees when you can avoid it?
  • Structure. Structure is the most important factor when choosing your investment loan. Do not cross-secure your investment loans with the home loan on your own personal home.

Use a repayment calculator

Use the calculator below to find out what your repayment will be if you choose an interest-only home loan. Then run the same calculations for principal and interest repayments so you can see what your repayments will be once the interest-only period ends. You’ll need to pay attention to both repayment figures and determine if you’ll be able to service the new repayments once your interest-only period ends.

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Logo for Westpac Flexi First Option Home Loan - Basic Variable Rate (Owner Occupier, P&I)
Westpac Flexi First Option Home Loan - Basic Variable Rate (Owner Occupier, P&I)

Up to $3,000 refinance cashback. A flexible and competitive variable rate loan. Eligible borrowers refinancing $250,000 or more can get $2,000 cashback per property plus a bonus $1,000 for their first application. Other conditions apply.

Logo for St.George Basic Home Loan - LVR 60% to 80% (Owner Occupier, P&I)
St.George Basic Home Loan - LVR 60% to 80% (Owner Occupier, P&I)

Up to $4,000 refinance cashback. With this competitive variable rate loan from St.George, refinancers borrowing $250,000+ can get up $4,000 cashback and borrow up to 90% of the property's value. (Terms, conditions & exclusions apply).

Logo for Athena Liberate Home Loan - 70% to 80% LVR Owner Occupier, P&I
Athena Liberate Home Loan - 70% to 80% LVR Owner Occupier, P&I

A competitive variable rate mortgage for owner occupiers $0 application and $0 ongoing fees. This interest rate falls over time as you pay off the loan.

Logo for Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR ≤ 80% (Owner Occupier, P&I)
Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR ≤ 80% (Owner Occupier, P&I)

Get a competitive variable interest rate with no application fee or ongoing fees.

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