Interest only loan calculator
Use the interest only loan calculator to work how much more in interest you’ll pay over the life of your home loan by choosing interest only.
This can help you make a better decision when choosing an interest only term.
By only having to make interest repayments for a period of your loan term, you can reduce the size of your mortgage repayments significantly.
Unfortunately, the industry regulator has forced banks to slowdown on approving interest only home loans so is it still possible to make just interest payments?
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.
Getting approved for an interest only loan
Interest only loans are traditionally beneficial to property investors looking to maximise their cash flow and give them a buffer to invest elsewhere or when building a home.
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 applies).
- 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% – 0.55%. You’ll also pay more in interest over the term.
- Extending an interest only period: Extending is often declined by a bank if you’ve already had an interest only period in which case you may need to refinance.
- Maximising your borrowing power: Banks use different methods to calculate your borrowing power if your new or existing loans are interest only.
Do you need an interest only home loan?
We can assess your situation and help find the home loan solution that meets your needs.
Please call us on 1300 889 743 or fill in our free assessment form to speak with one of our mortgage brokers.
Will I pay a higher interest rate?
Not necessarily.
The fact is that rates on interest only home loans are a moving target.
Regulations around investment loans can change at the drop of a hat meaning the appetite for interest only home loans can vary between lenders.
It’s totally “flavour of the week”.
We can help you choose a lender that won’t charge you a higher interest rate and fix your home loan to prevent the lender from changing their rate later.
It pays to shop around and we can help you do it.
Maximising your borrowing power
The way banks calculate your borrowing power for an interest only loan is actually really complicated.
If you apply for an interest only mortgage, banks tend to deduct the interest only period from the loan term when calculating your borrowing power.
In other words, a loan with a 30-year term and a 5-year interest only period will be assessed as a 25 year loan. This significantly reduces your borrowing power.
If you have existing loans on interest only, some lenders use the above method while others use the actual repayments plus a small buffer.
This small difference in methodology can mean a big difference in your borrowing power, especially for investors with multiple properties.
It’s important that you understand your financial limits and talk to us about what amount you can comfortably repay.
Good reasons for choosing interest only
If you’re an investor, the most legitimate reason for choosing interest only repayments is that you want to use your funds to pay off your home loan which isn’t tax deductible and so you pay the minimum on your investment loans.
This is because an investor will lose some of their negative gearing benefits if they pay off their loan early.
The other main advantage is that you can maximise your cash flow to make further investments, add capital value to your existing real estate through renovation work, or take care of other financial priorities like paying off higher interest debts.
Most lenders don’t even ask for a reason as this is accepted as standard.
If you’re choosing interest only repayments on a home loan then it’s more complicated.
Case study: When interest only works
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 and accessed some equity and combined this with some of their own savings to use as 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 principle.
The fixed rate limited Dale to making a maximum of $10,000 per year in extra repayments but this worked well for the couples’ 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 couples’ interest 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.
By utilising their offset account and paying extra into their investment loan, which is a higher interest debt than a standard home loan, the bank was happy to refinance their investment loan and extend their IO term to another 3 years.
At this point, the couple were also in a position to refinance their owner-occupied mortgage, which was now at 70% LVR and, again, used equity to use as a 10% deposit to purchase 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.
Bad reasons for choosing interest only
It is important to look at IO as part of a long-term investment strategy, not just a way of reducing your repayments in the short-term.
Where many borrowers get caught out is when their mortgage reverts to P&I repayments at the end of the interest only term.
This is particularly true for an owner-occupied borrower because the less you pay off the principle amount, the more you end up paying in interest.
Banks know this so they will apply a higher assessment rate for IO loans than P&I loans and look carefully at your living expenses and debt-to-income ratio.
Over the long-term, interest only will cost you more but you can still generate a good return on investment with the right strategy.
Case study: The hard truth about interest only
Chris has a $600,000 loan paying 5.70% per annum with a 5-year interest only period.
During the first 5 years, he just makes the minimum interest only payments of $2,850 per month.
After the interest only period, his repayments increase to $3,757 per month for the remaining 25 years.
Over a 30-year loan term, Chris ends up paying an extra $275 per month in home loan payments or an extra $44,294 in total.
Want an in-depth comparison of IO and P&I?
Check out the interest only versus principal and interest page to discover out the benefits and drawbacks of making IO or P&I repayments.
Alternatively, try the P&I or IO calculator to work out the hard dollar savings or interest expense over a 30-year loan term.
Not sure if an interest only home loan is right for you?
Call us on 1300 889 743 or complete our free online assessment form to find out.
Can I extend the interest only period?
The interest only period normally lasts for 5 years. This means that you’ll only need to pay the interest portion of the repayments until the term ends.
Most lenders will allow you to extend the interest only term by another 5 years depending on how regular you are with your payments. A handful of lenders may even consider extending the period by 10 years.
We can help you refinance with a lender that can offer you a second or third 5-year period as long as this does not put you at a financial disadvantage and you have a good reason for choosing interest only repayments.
For investment loans in particular, refinancing is the best way to keep your repayments to a minimum.
How often do I need to make the repayments on interest only?
Normally, banks don’t allow weekly and fortnightly payments if you’re making interest only payments.
This is because weekly and fortnightly interest only payments are usually considerably small.
Generally, you’ll be required to make standard monthly payments.
Am I allowed to make extra repayments?
Yes, banks usually allow you to make additional repayment on your loan.
Making higher repayments can help you reduce the size of your loan much faster. It’s also an effective way to minimise the loan term and reduce the interest that you’ll pay.
Alternatively, to keep your cash flow accessable when you need it, you may want to consider depositing extra funds into an offset account.
However, it’s important to keep in mind that you can’t make extra repayments if you’re on a fixed term or, at the very least, your ability to do so is restricted.
The only caveat to this is the fact that interest only periods and fixed terms are independent of each other.
With some lenders, it’s actually possible to get a 3-year only period on a 3-year fixed term.
The benefit of this is at the end of the 3-year fixed term, you can refinance to a lower interest rate and sign up for another interest only term (conditions apply).
How an offset account benefits interest only borrowers
Getting an offset account is a great strategy from a tax perspective.
The offset facility earns no interest, however, the bank will take the balance into account when assessing your loan interest.
This means that if you have a $800,000 loan and you’ve put $300,000 in the offset account, the bank will calculate interest on just $500,000. This can make a huge difference on the tax amount.
Not all lenders offer offset accounts on interest only loans and they may also limit the amount of extra repayments you can make.
To learn more about offset accounts, you can speak with one of our mortgage brokers on 1300 889 743 or complete our free online assessment form.
Why are banks limiting interest only approvals?
The Australian Prudential Regulation Authority (APRA) asked the banks to reduce the number of interest-only home loans they were approving in a move to reduce system-wise risk.
This was in response to the likelihood of a slowdown in housing price growth and the affect it would have on highly-leveraged homeowners.
The industry regulatory believed too many homeowners were choosing interest only home loans without being fully aware of the increased cost of these loans.
Interest-only owner-occupier loans make up around 40% of all interest-only loan approvals.
As a result, APRA forced banks to limit interest only approval to just 30% of all residential lending.
Despite this, it’s still possible to qualify for an interest only loan so speak with one of our experienced mortgage brokers about your situation.
Call us 1300 889 743 or complete our free online assessment form today.