Interest-only lowers the repayment by deferring the principal. That suits some borrowers and costs others.
Interest-only loans let you repay only the interest for a set period, commonly up to five years, so the balance does not fall until principal and interest repayments begin.
They work for investors who want the deductible debt kept intact and spare cash in an offset or against a non-deductible home loan, and for short gaps such as a build or parental leave. They cost you when used to afford a home you could not otherwise service, because repayments jump when the period ends and you pay more interest overall.
Part of the investment property loans guide.
From real Links files: an investment loan moved to five years interest-only, and a $66,650 interest-only balance where the rate difference was weighed in dollars.
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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.
Planning for the end of the interest-only period is what 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. The interest-only repayment calculator shows the step-up in dollars.
Four factors that decide availability and pricing.
No: the monthly repayment is lower, but the balance does not reduce and lenders often price interest-only higher, so total interest over the life of the loan is generally greater. It buys cash flow, which is sometimes exactly what a position needs.
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.
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.
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.
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.
Repayment type is one of several decisions investors weigh up, and our investment loan FAQ answers more of the questions that come with investing.
Charles can model both over the period you would hold the loan, including the step-up at the end.
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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.
