Interest-only home loans, honestly
Interest-only lending lowers your repayment by not repaying anything. That is not a criticism, it is the mechanism, and for some borrowers it is exactly right. The mistake is treating it as a cheaper loan rather than a deferred one, and discovering the difference when the period ends.
What interest-only actually does
For a set period, commonly one to five years, you pay only the interest charged and the balance does not reduce. Repayments are lower during that window. At the end of it the loan reverts to principal and interest over the remaining term, which means the same debt is repaid over fewer years, and the repayment steps up accordingly. That step-up is the part borrowers most often have not planned for.
Who it genuinely suits
Investors, most commonly, because interest on an investment loan is generally deductible where principal is not, so paying down non-deductible debt first can be the better order. Also borrowers with genuinely lumpy income who need repayment flexibility, and owner-occupiers bridging a defined short-term squeeze such as parental leave or a renovation. In each case there is a reason and an end point.
What it costs you
More interest overall, because the balance is not reducing while the period runs. Lenders also frequently price interest-only higher than principal and interest, particularly for investors, so the lower repayment can come with a higher rate. And serviceability is usually assessed on the eventual principal and interest repayment over the shortened remaining term, which means an interest-only loan can be harder to qualify for rather than easier.
The end of the period
This is the planning that matters. When interest-only ends, the repayment rises, sometimes substantially. Options at that point include reverting as scheduled, applying to extend, or refinancing, and none of them is guaranteed, because each requires a fresh assessment against the policy of the day. Deciding what happens at the end before you start is the difference between a strategy and a surprise.
What lenders look at on an interest-only file
Four factors that decide availability and pricing.
Investment and owner-occupier interest-only are treated differently by most lenders, in both availability and price.
Serviceability is commonly tested on the principal and interest repayment over the remaining term, not on the lower interest-only figure.
Lower ratios generally widen the options. High-LVR interest-only lending is more restricted.
Lenders reasonably ask what happens when the period ends. A clear answer strengthens the file. Refinancing is one route, not the only one.
Weighing interest-only against principal and interest?
Charles can model both over the period you would actually hold the loan, including the step-up at the end.
Interest-only questions
Is an interest-only loan cheaper?
The monthly repayment is lower; the loan is not cheaper. You pay interest on a balance that is not reducing, and lenders often price interest-only higher, so total interest over the life of the loan is generally greater. It buys cash flow, and cash flow is sometimes exactly what a position needs.
How long can an interest-only period last?
Commonly one to five years, and lenders differ on the maximum and on whether extensions are available. Extensions are not automatic; they require a fresh assessment against policy at the time, which may not be the policy that applied when you started.
What happens when the interest-only period ends?
The loan reverts to principal and interest over the remaining term. Because the same balance is now repaid over fewer years, the repayment rises, sometimes sharply. Planning for that step-up at the outset is the single most important thing about choosing interest-only.
Do investors always use interest-only?
No, and the assumption that they should is worth questioning. It can suit an investor with non-deductible home debt to pay down first, but it is a strategy with a tax dimension that belongs with your accountant as much as your broker. Plenty of investors are better served by principal and interest.
Is it harder to qualify for interest-only?
Frequently, yes. Because serviceability is usually assessed on the eventual principal and interest repayment over a shortened remaining term, the test can be tougher than for a standard loan. Availability also varies more between lenders than for ordinary lending.
Related guides
General information only, not credit or financial advice. Professional lending policies, eligible occupations and loan-to-value thresholds vary by lender and change over time. Eligibility is confirmed against current lender policy in an assessment; nothing on this page is a promise that any lender will approve any application.
Model both before you choose.
Twenty minutes with Charles: interest-only against principal and interest on your actual numbers, including what happens when the period ends. Free, no credit check.
Prefer a callback?Charles calls back within one business day. No documents needed yet.
