Interest-only home loan refinancing

Whether you're refinancing to an interest-only loan or switching from interest only to principal and interest repayments, here's what you need to know.

Interest-only home loans allow you to repay the interest on a mortgage without making payments on the loan principal amount for a specified period. This reduces your monthly repayments initially.

But interest-only loans are risky because you're not really paying your loan off until you start paying back the money you've borrowed. So if you're thinking about refinancing to an interest-only mortgage, or are trying to leave one, you really need to know how these loans work.

Interest-only home loan comparisons

Rates last updated October 16th, 2019
$
Loan purpose
Offset account
Loan type
Repayment type
Your filter criteria do not match any product
Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.38%
3.38%
$0
$0 p.a.
80%
This rate will drop to 3.38% p.a on 29 October 2019 for new and existing customers. This is a competitive interest-only rate product that's also low in fees.
3.34%
2.99%
$0
$0 p.a.
80%
Owner occupiers can refinance to one of the most competitive interest-only rates in the market. No application fee and no ongoing fees. Refinancers only.
2.89%
3.62%
$395
$0 p.a.
80%
A one year fixed rate offer with no ongoing bank fees.
3.79%
4.71%
$0
$395 p.a.
95%
3.99%
4.44%
$0
$0 p.a.
90%
3.49%
5.01%
$0
$395 p.a.
80%
3.34%
3.24%
$0
$0 p.a.
80%
Current property investors can switch to one of the most competitive interest-only investor rates in the market. No application or ongoing fees. Refinancers only.
3.04%
4.08%
$395
$0 p.a.
80%
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
3.79%
3.81%
$0
$0 p.a.
80%
Buy your home and make interest only payments at first with a competitive rate.
2.84%
3.41%
$395
$0 p.a.
80%
A competitive 3 year fixed rate with no ongoing bank fees.
3.84%
4.16%
$0
$299 p.a.
80%
Get a 100% offset account, access to a redraw facility and a competitive rate tied to your LVR.
3.94%
3.93%
$0
$10 monthly ($120 p.a.)
80%
A variable rate home loan with no application fees and the opportunity to earn Velocity points.
3.74%
$0
$349 p.a.
80%
Low fee line of credit loan with package benefits.
3.69%
3.45%
$375
$15 monthly ($180 p.a.)
80%
Home buyers with a 20% deposit can get this low interest-only rate. It also comes with a 100% offset account.

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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.

Get in touch with a mortgage broker today

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13 Responses

  1. 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.

  2. 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.

  3. 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 a Interest Only loan that eventually you will need to pay back the principal.

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

      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,

      While we can’t provide any personal or financial advice, we can provide general advice regarding interest only payments.

      Please see this link for a list of articles we have regarding interest only home loans.

      Cheers,
      Shirley

  4. 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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