Interest Only Loans

Interest-only loans can be a clever financial move when used thoughtfully. At Home Loan Experts, we’ve guided thousands of borrowers to take advantage of interest-only repayments. This approach can boost cash flow, grow wealth, and organise finances more effectively. But it’s not suitable for everyone.

This structure can be particularly beneficial for:

• Property investors who want to maximise cash flow and claim tax deductions
• Homebuyers building or renovating, who want to reduce outgoings during construction
• Borrowers with future financial plans, like expected salary increases or asset sales

That said, without proper planning, transitioning to higher repayments once the interest-only period ends can put pressure on your budget. That’s why we work closely with you to map out a strategy that supports your long-term goals. If you’re curious about whether an interest-only loan suits your needs, we’re here to guide you through every detail, ensuring you have the clarity and confidence to make the right decision.

What Is An Interest-only Loan?

An interest-only loan is a type of mortgage where, for a set period, typically five years, you pay only the interest charged on the loan, not the principal (loan amount). This means your monthly repayments are lower during the interest-only period. This kind of loan doesn’t reduce your loan balance during the interest-only period. Once that period ends, the loan automatically converts to principal-and-interest (P&I) repayments.

How Does An Interest-only Loan Work?

Here’s how an interest-only loan functions in practice:

Step 1: Apply With The Right Lender

Not all lenders offer interest-only loans for every scenario. Whether you’re investing, building, or need short-term repayment relief, it’s important to find a lender whose options align with your goals. A mortgage broker can help guide you in the right direction.

Step 2: Loan Assessment

The lender will assess your eligibility based on:

• Your income and employment stability
• Your credit history
• Your Loan-to-Value Ratio (LVR)
• The purpose of the loan (investment or owner-occupier)

For interest-only loans, lenders are typically more cautious, and the approval criteria can be more strict than for standard P&I loans.

Step 3: Choose The Interest-Only Term

Most lenders offer an interest-only period of 3-5 years. Some, under the right conditions, offer up to 10 years. During this time, you will be required to pay only the interest portion of your repayments; your principal will not decrease unless you make extra repayments.

Step 4: Make Interest-Only Repayments

Once your loan is settled, you’ll begin making monthly interest-only repayments. This keeps your repayments lower for a set period. It can help free up cash for other priorities, like investing, renovating, or managing living costs during a build.

Keep in mind: While interest-only loans can offer short-term repayment relief, they usually result in more interest paid over the life of the loan than principal-and-interest loans.

Step 5: Transition To Principal-and-Interest

At the end of the interest-only term, the loan automatically converts to P&I repayments. Because your principal hasn’t decreased during the interest-only period, the remaining loan term is shorter, resulting in higher repayments. For example, a 30-year loan with a 5-year interest-only term will have the principal repaid over the remaining 25 years, increasing your monthly repayment amount.

Step 6: Plan Your Exit Strategy

It’s crucial to plan ahead:

• Will you refinance to another interest-only term?
• Will your income be higher by then, to handle the higher repayments?
• Are you planning to sell the property before the loan converts to P&I payments?

We help our clients prepare well in advance by reviewing their options at least 6–12 months before the interest-only term ends.

Interest only loan calculator

Our Interest-Only Loan Calculator helps you understand your repayment options and long-term costs more clearly.

Here’s what it helps you do:

• See the difference between lower upfront interest-only repayments and higher P&I repayments, which reduce your loan balance faster.
• Understand how much more interest you’ll pay over the life of the loan by selecting an interest-only period instead of starting with P&I repayments.
• View an interactive chart that shows how your loan evolves, highlighting the impact of delaying principal repayments.
• The calculator takes into account the length of the interest-only term and automatically adjusts to show your P&I repayments once that period ends.

If you need help with getting a home loan, call 1300 889 743 or complete our free assessment form to speak with one of our mortgage brokers.

Who Can Qualify For An Interest-only Loan?

Qualifying for an interest-only home loan will depend on the lender you choose, the percentage of the property value you borrow and the purpose of your loan:

• Interest-only home loan: You can borrow up to 90% of the property value if you have a good reason for choosing interest only or up to 95% with some of our lenders (strict criteria apply).
• Interest-only investment loan: You can borrow up to 90-95% of your investment property value with interest-only repayments (select lenders only).
  Interest-only term: The maximum available in Australia is 10 years.
• Getting a low rate: Banks load the interest rate for interest-only loans anywhere from 0.1% to 0.55%. You’ll also pay more in interest over the full term.
• Extending an interest-only period: Extending an interest-only period can be difficult, especially if your circumstances haven’t changed or you’re already near the maximum term allowed.
• Maximising your borrowing power: Banks use different methods to calculate your borrowing power if your new or existing loans are interest only.

While APRA previously capped interest-only lending at 30% of new loans, this restriction was lifted in 2018. However, many lenders continue to apply stricter internal policies to manage risk. Our brokers have access to specialist lenders that continue to offer these loans competitively.

Case Studies

Dale and his partner had been paying off their home loan for 3 years before they decided to take the plunge and buy their first investment property. They had cleverly been making extra repayments on their mortgage during this time and, thanks to growth in the value of their property, their Loan-to-Value Ratio (LVR) was at 80% of the property value.

The couple refinanced their home loan, accessed some equity and combined this with some of their own savings to put together a 10% deposit on a unit in a neighbouring suburb. Dale chose a 3-year interest-only term and made some extra repayments on his fixed-rate investment loan whenever he earned overtime, in order to reduce some of the principal.

The fixed rate limited Dale to making a maximum of $10,000 a year in extra repayments but this worked well for the couple’s financial situation. In the final year of his interest-only period, Dale also began depositing an extra $50 a week into his offset account, just in case he needed to access those funds. What also worked in the couple’s favour was that they purchased their unit in a growth suburb. So, although they purchased the unit at 90% LVR, their LVR was now at 78% LVR with the increased value of their home.

By using their offset account and paying extra into their investment loan, which is a higher-interest debt than a standard home loan, they made it so the bank was happy to refinance their investment loan and extend their interest-only term to another 3 years. At this point, the couple were also in a position to refinance their owner-occupier mortgage, which was now at 70% LVR and, again, used equity to make a 10% deposit for the purchase of another investment property.

By being savvy with their spending and making extra repayments where they could, Dale and his partner were able to start building their property portfolio through a low-risk, interest-only strategy.