Interest-only Home Loan Refinance Guide

Rates and fees last updated on

Refinancing to an interest-only loan can give you lower mortgage repayments and tax benefits for some investors.

refinance home loanInterest-only home loans allow you to repay the interest on a mortgage without making payments on the principal amount for a specified period, which can lower your monthly repayments.

However, there can be a greater risk in doing this because ultimately you will need to pay back the principal and delaying this means that your repayments won’t change until you start paying down that principal.

Most borrowers choose to refinance to an interest-only home loan when they are experiencing financial hardship or are building a home.

Many property investors also take advantage of interest-only refinancing especially when a property becomes vacant as this can help in terms of cash flow.

Interest-only home loan comparisons

Rates last updated August 21st, 2017.

HSBC Home Value Loan - Resident Owner Occupier only

Application fee waived for Resident Owner Occupier only.

February 15th, 2017

Bank Australia Basic Home Loan - Variable (Owner Occupier)

Interest rate increased by 0.08%

February 20th, 2017

IMB Budget Home Loan - LVR <=90% (Owner Occupier)

Comparative rate increases by 0.10% | Interest rate increases by 0.10%

April 5th, 2017

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Richard Whitten Richard
Loan purpose
Offset account
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Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment
Greater Bank Ultimate Home Loan - Discounted 1 Year Fixed LVR ≤85% ($150K+ Owner Occupier)
Discount off an already competitive interest rate for loans over $150k. NSW, QLD and ACT residents only.
3.49% 4.47% $0 $375 p.a. 85% Go to site More info
Bank Australia Basic Home Loan - Special LVR <70% (Owner Occupier)
A special variable rate home loan with no application or ongoing fees.
3.74% 3.75% $0 $0 p.a. 70% Go to site More info
HSBC Home Value Loan - Resident Owner Occupier only
Enjoy a low variable rate with no ongoing fees and borrow up to 90% of the value of the property.
3.85% 3.86% $0 $0 p.a. 90% Go to site More info
Bank Australia Basic Home Loan - Variable (Owner Occupier)
A competitive variable rate that allows borrowers to borrow a minimum of $100,000 with a $0 ongoing fee.
3.86% 3.87% $0 $0 p.a. 80% Go to site More info
IMB Budget Home Loan - LVR <=90% (Owner Occupier)
Get a competitive rate without features you may not use.
3.97% 4.02% $445 $0 p.a. 90% Go to site More info
NAB Base Variable Rate Home Loan - Owner Occupier (Interest Only)
A no frills home loan from NAB with redraw facility and a high maximum LVR.
4.70% 4.42% $600 $8 monthly ($96 p.a.) 90% Go to site More info
IMB Essential Home Loan - LVR <=90% (Owner Occupier)
Get access to a redraw facility and offset account without the annual fee.
4.19% 4.19% $0 $0 p.a. 90% Go to site More info
Greater Bank Great Rate Home Loan - Discounted Variable ($150K+ Owner Occupier)
A competitive variable rate with a redraw facility. NSW, QLD and ACT residents only.
3.99% 3.99% $0 $0 p.a. 85% Go to site More info
NAB Choice Package Variable Rate Home Loan - Up to $250k Interest Only (Owner Occupier)
Enjoy a low interest rate home loan with 100% offset account with redraw facility.
5.17% 5.21% $0 $395 p.a. 95% Go to site More info
AMP Basic Package Variable Rate Loan - (Owner Occupier, IO)
A basic package loan with a competitive rate and no ongoing fee.
4.56% 4.28% $0 $0 p.a. 90% Enquire now More info
4.37% 4.91% $600 $395 p.a. 95% More info
5.21% 5.59% $0 $375 p.a. 80% Enquire now More info
St.George Advantage Package Home Loan - $150K to $249K (Special Discount Owner Occupier) (IO)
Enjoy zero establishment fee and discounts on other products.
5.21% 5.59% $0 $395 p.a. 95% Enquire now More info

When it’s good to refinance interest-only loans

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. These are:

  • Lower interest rates are available. Realistically, the main reason people refinance an interest-only loan is if interest rates have fallen and you are still paying a higher interest rate. With interest-only loans you pay only the interest, so any drop or rise in rates has a bigger impact than if you were paying the principal portion of your property off too. By refinancing to a lower interest rate loan, you may not only increase the interest-only period but reduce the repayments that you have to make.
  • The interest-only period has ended. Another reason that you may want to refinance your interest-only loan is if the interest-only period is about to end, which for most loans is between 5 - 10 years. You may not be ready to start paying both the interest and the principal off, so refinancing the loan you can can allow you to just pay the interest portion.
  • Your property value has increased. If your property's value has increased you'll have more equity and you might want to access it for a number of reasons. Staying with your existing lender is one option and selling the property is another, but you might also want to consider refinancing to a different lender in order to take advantage of better rates and features, especially if you plan to renovate or build a new property.
  • Change your interest scheme. If you've decided to make the switch to a principal and interest loan, you might want to refinance. This may be because your existing loan won't offer you the features you want if you switch from interest-only repayments, or maybe a combination of the other factors above. If this is the case, make a good comparison of the loans available, as products can change over a short period of time.
  • New features. Depending on how you plan to use your interest-only loan, you might want to refinance to enjoy different features or options. One such example is the ability to pay your interest in advance, usually offered on a fixed rate loan. The ability to do this means you can prepay the interest charges for the next year and claim the tax deduction for them this year, which can be useful for some investors. Contact an accountant to discuss whether or not this would suit your tax strategy.

How to find the best interest-only loan when you refinance

TitleOnce you've made the decision to refinance and are in the market to compare different home loans, consider these points:

Tell your lender you're going to leave

If you're leaving your existing lender for reasons other than finding a lower rate (e.g to find better features or because the interest-only period is coming to an end) this technique won't be as effective; however, sometimes telling your provider you're going to leave can net you an interest rate discount. This saves you the hassle of changing lenders and paying any fees involved with refinancing.

Get quotes from providers

Lender websites often only feature the main features of an interest-only refinance loan. To get the full terms and conditions of all the interest-only loans and to get an estimate on how much refinancing will cost you, approach your provider and request a quote.

How to compare interest-only home loans

Choosing an interest-only loan can be tricky, so it’s important to take time to compare the features on different loans to get one that suits your needs and to ensure that your mortgage is affordable. Here are the main features to use when comparing interest-only home loans:

  • Interest rate. An interest-only loan can help you afford a more expensive home by allowing you to pay the interest portion of the loan for a period of about 5-10 years without repaying any of the principal amount. Once the period ends, you’ll have to start paying a high outstanding principal amount or refinance to another loan. It’s therefore important to shop around for an interest-only loan with relatively low interest rates to ensure the home loan you apply for is affordable. If you come across a lender offering lower interest rates, consider refinancing your current interest-only loan or standard mortgage to save more on interest repayments.
  • Loan features. Interest-only loans with a longer repayment period and favourable repayment frequency can be easier to repay and they can put less pressure on your finances. Go for a loan with an interest-only period that suits you and a monthly repayment amount that you can easily service. Some lenders offer you the option of repaying your interest amount in advance as a lump sum, allowing you to save money and make tax deductions. A lender offering an interest-only offset account can allow you to reduce your interest repayments even further, depending on your savings.
  • Loan fees. Like other types of mortgage plans, interest-only home loans can sometimes also have hidden fees, including agent fees, application fees and others. Most lenders will only disclose the main features of the home loan and hide other fees in the fine print. To ensure you get an affordable interest-only home loan, compare the terms of different interest-only loans and use a refinance calculator to compare costs on different loans.

Things to avoid with interest-only loan refinancing

interest onlyBe mindful that you will eventually need to repay the principal loan amount at some point in time. The main reason why interest-only home loans are popular with property investors is because they generally intend to sell the property in the future and in the process pay back the principal.

However, if your interest loan is used for your personal property and you're refinancing to delay paying back the principal, it may be a good idea to speak to your lender for alternate options.

Refinancing any loan can be a long and complicated process and refinancing an interest-only loan is no different. Before deciding whether or not to agree to a refinance you should calculate whether or not it would be worth it. Once these steps are completed, start a comparison today.

Frequently asked questions about refinancing an interest-only home loan

Most lenders allow you to reduce the amount of interest you pay on your interest-only home loan by depositing money into an offset account. The savings are used to offset your monthly mortgage repayments. If you have $5,000 in your offset account on a $200,000 loan for example, your interest will only be calculated on a loan amount of $195,000.

Unlike standard home loans, interest-only home loans do not require you to make interest and principal payments together, meaning that you can make relatively low mortgage payments on an expensive property for a certain period of time by only paying the interest. For this reason, these loans are more suited for investors who do not plan to hold on to the property beyond the interest-only period.

Marc Terrano

A passionate publisher who loves to tell a story. Learning and teaching personal finance is his main lot at Talk to him to find out more about home loans.

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Bank Australia Basic Home Loan - Variable (Owner Occupier)

A competitive variable rate that allows borrowers to borrow a minimum of $100,000 with a $0 ongoing fee.

NAB Choice Package Home Loan - 2 Year Fixed (Owner Occupier P&I)

A fixed rate package with flexible repayment options. 350K NAB Rewards Points offer available. Terms and conditions apply.

Greater Bank Ultimate Home Loan - Discounted 1 Year Fixed LVR ≤85% ($150K+ Owner Occupier)

Discount off an already competitive interest rate for loans over $150k. NSW, QLD and ACT residents only.

IMB Budget Home Loan - LVR <=90% (Owner Occupier)

Get a competitive rate without features you may not use.

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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?

    • Staff
      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,

    • Default Gravatar
      JamesAugust 12, 2014

      A Valuation Agent? What is that?

    • Staff
      MarcAugust 12, 2014Staff

      Hi James,
      thanks for the reply.

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

      I hope this helps,

  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.

    • Staff
      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 how Paying Your Home Loan Quicker could give you some insights.


    • 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.


    • Staff
      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.


  4. Default Gravatar
    SueJuly 18, 2014

    Why is Members Equity not included in this article?

    • Staff
      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.


    • Staff
      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,

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