Get an interest-only investment loan
As an investor, your interest payments are tax deductible. So an interest-only investment loan lets you minimise your non-tax deductible costs.
We’re reader-supported and may be paid when you visit links to partner sites. We don’t compare all products in the market, but we’re working on it!
Interest-only loans end up costing borrowers more in the long run. You delay repaying the full loan amount, which makes your repayments lower in the short term when you just repay the interest. This presents investors with an opportunity because interest payments are tax deductible (payments against the loan principal are not). Investors can use interest-only loans to pay less in the short term while cutting down their tax bill.
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 2.09% p.a.
- Comparison rate of 2.71% p.a.
- Application fee of $0
- Maximum LVR: 80%
- Minimum borrowing: $100,000
The loans below have interest-only repayments. However, the repayment calculation shows principal and interest repayments. Your initial repayments will be lower.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
eChoice is an award-winning broker with over 18 years of experience, and has helped more than 50,000 Australians to find the right home loan.
- Completely free, expert home loan advice.
- Offers a suite of digital tools to make you a smarter borrower.
- Calculate your borrowing power with a free personalised home loan report.
Technology Platform of the Year 2016
Australian Broking Awards
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.
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.
There are several reasons why investors use interest-only investment loans:
- Tax minimisation
- Improved cash flow through negative gearing
- 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.
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!"
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.
More guides on Finder
Amazon Prime Day 2021: Don’t miss these deals on 21 June
Amazon Prime Day is returning to Australia in the first half of 2021. Here are six online deals you need to know about.
How to buy TitanSwap (TITAN) in Australia
This guide will show you step-by-step instructions on how to buy the TitanSwap (TITAN) token as well as a list of exchanges you can trade it on.
Canterbury Bulldogs vs St George Illawarra Dragons NRL: Start time and watch free
The one-win Bulldogs return after a bye, hopefully refreshed and ready to meet the Dragons.
NSW first home owners tax reform offers 25K grants
First home buyers in NSW could be given up to $25,000 towards their first home purchase – find out if you're eligible.
24 PlayStation 5 consoles are up for grabs this long weekend
eBay is giving away 24 PlayStation 5 prize packs this long weekend - here's how to enter.
Does anyone actually need Twitter Blue?
Here's everything included in Twitter Blue and how much it costs.
How to watch UFC 263 Adesanya vs Vettori 2 live in Australia
Undisputed champion Israel Adesanya is ready for his long-awaited rematch against Marvin Vettori in Arizona.
HBO Max Gossip Girl reboot: new trailer drops ahead of Australian broadcast
An updated version of Gossip Girl is coming our way – and it looks too good to miss.
Finder Daily Deals: The 5 best online deals in Australia today
Today's best Finder Daily deals include: 50% off 4K TVs, $200 off Dyson vacuum cleaners, win $10,000 with Optus.
Paul Gallen vs Justis Huni: Fight time and how to watch live online
Undefeated heavyweight Justis Huni and former NRL star Paul Gallen are ready for battle as Termination Day approaches.
Home Loan OffersImportant Information*
Ask an Expert