Refinancing an interest-only home loan

How refinancing to (or from) an interest-only home loan works.

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If you have a home loan with interest-only repayments you can refinance to a loan with principal-and-interest repayments. Switching to an interest-only loan is also possible, and is easier if you already have some equity in the property (meaning you've paid off a chunk of your mortgage).

I want to switch to an interest only loan


Interest-only loans are suited to the specific needs of a certain few borrowers (and mainly property investors). Due to this, there are only a few situations when it's beneficial to refinance an interest-only loan.

Reducing your repayments in the short term

Switching from principal and interest to interest only payments will drastically reduce your loan repayments: for now. This is because you only have to pay the interest charged on top of the loan. But over time you will end up paying a lot more because you're paying more interest and delaying the repayment of the money you've borrowed.

Borrowers who are struggling to make repayments may find some relief in refinancing to interest only payments. But it's important to understand that in the long term it's costing you more.

Also, you could try asking your current lender to switch your loan to interest only payments. This can be easier than refinancing.

To take advantage of investor tax benefits

Interest only loans are popular with property investors, partly because of tax benefits. As an investor you can deduct the interest paid on your investment loan from your tax bill. This is something you can't do as an owner occupier, however.

Some investors also try to hold an investment property for only a few years while hoping for large capital gains. This can work if you buy the right property in a booming market (although it's a risky strategy). In this case, refinancing to an interest only loan makes sense because it's cheaper. You're not worried about repaying the loan because you're planning to sell the property in a short period of time.

I want to switch from interest only to a principal and interest loan

This is a more common scenario and has a number of benefits. With a principal and interest loan you can:

  • Pay off your debt and build equity. Once you start paying off the loan principal you own more of the property. You're building equity and wealth for the future.
  • Access lower rates and more mortgage features. Interest only loans usually have higher interest rates and fewer mortgage features such as offset accounts. This means you can get a more competitive loan with useful features.

But there are a couple of things to watch out for when leaving an interest only loan:

  • Your repayments will increase. Principal and interest repayments are much higher than interest only repayments. Be prepared for this increase in costs by looking at a loan repayment calculator, assessing your income and spending and doing a budget.
  • You might not have much equity. If you've only been making interest only repayments then you haven't built equity. This makes it harder to refinance. If you started with a 20% deposit and your property hasn't lost value you should be safe. But if you started with a small deposit and haven't repaid any mortgage principal you may need to pay lenders mortgage insurance. This is a premium borrowers pay when borrowing more than 80% of their property's value. It can be quite expensive.

Still confused about interest-only refinancing? Speak to a mortgage broker

Mortgage brokers can help you find a new loan when you're in a complicated situation. And this includes interest-only refinancing. They can advise you on the right course of action and help you avoid making a costly mortgage mistake.

Interest-only home loan comparisons

$
years
Name Product Interest Rate (p.a.) Comp. Rate (p.a.) Fees Monthly Payment

UBank UHomeLoan Fixed IOHome 1Y Fixed≥ 20% Deposit

UBank UHomeLoan Fixed
2.14%
2.35%
  • App: $0
  • Ongoing: $0 p.a.
$567
A one year fixed rate offer with no ongoing bank fees.

homeloans.com.au Low Rate Home Loan with Offset IOInvestment≥ 20% Deposit

homeloans.com.au Low Rate Home Loan with Offset
2.69%
2.52%
  • App: $0
  • Ongoing: $0 p.a.
$609
A competitive rate with no application or ongoing fee. This loan is not available for construction.

Nano Variable Home Loans IOHome≥ 25% Deposit Refi Only

Nano Variable Home Loans
2.49%
2.17%
  • App: $0
  • Ongoing: $0 p.a.
$594
An interest-only loan for refinancing owner-occupiers with 25% deposits or equity. This loan has no fees.

UBank UHomeLoan Variable Rate IOHome≥ 20% Deposit

UBank UHomeLoan Variable Rate
2.88%
2.55%
  • App: $0
  • Ongoing: $0 p.a.
$624
This is a competitive interest-only rate product that's also low in fees.

homeloans.com.au Low Rate Home Loan with Offset IOInvestment≥ 40% Deposit

homeloans.com.au Low Rate Home Loan with Offset
2.59%
2.42%
  • App: $0
  • Ongoing: $0 p.a.
$601
This competitive variable rate loan is for investors who want interest-only repayments. You will need a 40% deposit.

Nano Variable Home Loans IOInvestment≥ 25% Deposit Refi Only

Nano Variable Home Loans
2.59%
2.40%
  • App: $0
  • Ongoing: $0 p.a.
$601
This variable investment loan has interest-only repayments and is for refinancers only. Fast online approval. Requires a 25% deposit.

UBank UHomeLoan Variable Rate IOInvestment≥ 20% Deposit

UBank UHomeLoan Variable Rate
2.60%
2.58%
  • App: $0
  • Ongoing: $0 p.a.
$602
Pay interest only repayments with this special offer for investors.

Athena Variable Home Loan IOHome≥ 30% Deposit

Athena Variable Home  Loan
2.84%
2.32%
  • App: $0
  • Ongoing: $0 p.a.
$621
A variable loan with interest-only repayments for owner-occupiers with 30% deposits. This loan has no fees.

loans.com.au Green Home Loan IOHome≥ 10% Deposit

loans.com.au Green Home Loan
2.08%
2.39%
  • App: $0
  • Ongoing: $0 p.a.
$562
Construction Loan: A competitive variable rate loan available for the construction of an energy-efficient home.

UBank UHomeLoan Fixed IOInvestment 1Y Fixed≥ 20% Deposit

UBank UHomeLoan Fixed
2.29%
2.55%
  • App: $0
  • Ongoing: $0 p.a.
$578
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.

homeloans.com.au Low Rate Home Loan with Offset IOHome≥ 20% Deposit

homeloans.com.au Low Rate Home Loan with Offset
2.54%
2.37%
  • App: $0
  • Ongoing: $0 p.a.
$597
Owner-occupiers with 20% deposits can get this variable interest-only loan.

Athena Variable Home Loan IOInvestment≥ 30% Deposit

Athena Variable Home  Loan
2.69%
2.52%
  • App: $0
  • Ongoing: $0 p.a.
$609
Investors with 30% deposits can get this fee-free variable rate loan. This loan has interest-only repayments.

homeloans.com.au Low Rate Home Loan with Offset IOHome≥ 40% Deposit

homeloans.com.au Low Rate Home Loan with Offset
2.44%
2.27%
  • App: $0
  • Ongoing: $0 p.a.
$590
A competitive rate with no application or ongoing fee. This loan is not available for construction.

loans.com.au Green Home Loan IOInvestment≥ 10% Deposit

loans.com.au Green Home Loan
2.59%
2.90%
  • App: $0
  • Ongoing: $0 p.a.
$601
Construction Loan: Investors building an energy-efficient property can get a discounted rate on this green investment loan with interest-only repayments.

UBank UHomeLoan Fixed IOInvestment 5Y Fixed≥ 20% Deposit

UBank UHomeLoan Fixed
2.64%
2.61%
  • App: $0
  • Ongoing: $0 p.a.
$605
Forget about rate rises for 5 years and minimise repayments on your investment mortgage.
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13 Responses

    Default Gravatar
    FranAugust 18, 2017

    I have existing loan interest free for a block of land now my lender won’t let me have interest only loan .were can I get another lender to take that loan on. As it’s going to be extremely hard to pay it.

    Default Gravatar
    JamesAugust 9, 2014

    I understand that the major banks have forced down the fees Valuers are paid through a bank controlled valuation clearing house ValEx and that many Valuations are now undertaken without an internal inspection and by junior Valuers. How can I ensure that I get a proper Valuation by an experienced Valuer when dealing with Banks?

      Avatarfinder Customer Care
      MarcAugust 11, 2014Staff

      Hi James,
      thanks for the question.

      Unfortunately short of contacting the valuation company before they send out a valuation agent and requesting an experienced agent (which still may not net you results even if this is something you’re able to do), there’s not much to do to ensure you get a good agent. Keep in mind that banks will often get conservative valuations of property to reduce their risk.

      One way you can ensure your property gets a good valuation is to work on what you can control, which is your property. This means to do some of the following:

      – Ensure your property’s presentation is tip top, meaning completely clean and any cosmetic issues fixed
      – Provide the valuer with honest recent information about sales in the area, particularly if they’re similar to your home and the price you want
      – Make improvements to your property if necessary and catalogue these improvements comprehensively
      – Don’t distract the valuer, if you need to point out one or two features you feel are important do so, but let them do their job as properly as possible.

      I hope this helps,
      Marc.

      Default Gravatar
      JamesAugust 12, 2014

      A Valuation Agent? What is that?

      Avatarfinder Customer Care
      MarcAugust 12, 2014Staff

      Hi James,
      thanks for the reply.

      By valuation agent I’m referring to an accredited property valuer.

      I hope this helps,
      Marc.

    Default Gravatar
    LloydJuly 20, 2014

    I have been told from two sources that taking an interest only loan, with off set, and paying the difference from the principle and interest loan into the off set account + any incoming moneys into the off set + a 55 day credit card for living expenses can help me pay off my home loan faster? Is this possible? Cheers.

      Avatarfinder Customer Care
      ShirleyJuly 21, 2014Staff

      Hi Lloyd,

      Thanks for your question.

      This strategy could work if used effectively – keep in mind that with an interest-only loan eventually will need you to pay back the principal.

      Our article on paying your home loan faster could give you some insight.

      Cheers,
      Shirley

      Default Gravatar
      LloydJuly 21, 2014

      Hi Shirley. The article didn’t really address the strategies needed for the “interest only method” nor how they actually worked. Any more information you can give me would be greatly appreciated. Cheers.

      Lloyd

      Avatarfinder Customer Care
      ShirleyJuly 21, 2014Staff

      Hi Lloyd,

      Thanks for your inquiry.

      You may refer to our guide on interest-only home loans. 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.

      Cheers,
      Shirley

    Default Gravatar
    SueJuly 18, 2014

    Why is Members Equity not included in this article?

      Avatarfinder Customer Care
      ShirleyJuly 18, 2014Staff

      Hi Sue,

      Thanks for your feedback.

      Although we cover a wide range of products, providers and services we don’t cover every product, provider or service available in the market so there may be other options available to you.

      The product we feature from ME Bank at this current point in time does not offer interest only repayments.

      Cheers,
      Shirley

      Avatarfinder Customer Care
      MarcJuly 18, 2014Staff

      Hi Sue,
      thanks for the comment.

      We strive to provide as many home loans as possible for comparison across our site, but are not yet able to include every loan on the market. Please continue to check back as we’re constantly trying to add more loans for our users to compare.

      I hope this helps,
      Marc.

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