Compare interest-only home loans

How we calculate Home Loan Finder Scores

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What different scores mean

9+

Excellent

These home loans offer low costs, coupled with a host of features, giving the best overall value.

7+

Great

These home loans may have slightly higher interest rates or fewer features but overall, a competitive offering.

5+

Standard

Usually the home loans would offer above average rates. They may still include some competitive features.

0+

Basic

Higher costs and/or fewer features.

What is Finder Score?

The Finder Score crunches 7,000 home loans across 120+ lenders. It takes into account the product's interest rate, fees and features, as well as the type of loan eg investor, variable, fixed rate - this gives you a simple score out of 10.

To provide a Score, we compare like-for-like loans. So if you're comparing the best home loans for cashback, you can see how each home loan stacks up against other home loans with the same borrower type, rate type and repayment type. We also take into consideration the amount of cashback offered when calculating the Score so you can tell if it's really worth it.

Read the full Finder Score breakdown

What is an interest-only home loan?

With an interest-only home loan, you don't repay the money you've borrowed at first. You just pay the interest charges. This makes your repayments much smaller, but only during the interest-only period.

Most Australians have 30-year home loans. But an interest-only period typically lasts between 1 and 5 years. Then the loan reverts to a principal-and-interest loan.

That's when your repayments get bigger. Now you're paying off the money you've borrowed plus all the interest.

How interest-only loans work

There are 2 parts to any home loan repayment: the principal and the interest.

Most Australian borrowers choose principal-and-interest home loans. They borrow money and pay it back, plus interest at the same time.

Principal

The principal is the money you borrow from the lender. It's also called the loan amount. This is the money you have to repay.

Interest

Interest is charged by the lender as a percentage of the money you've borrowed (the principal). The amount of interest charged depends on the loan's interest rate.

But by choosing an interest-only period, you can temporarily delay repaying the principal. But your lender will charge you more for this. You'll have a higher interest rate and your repayments will increase once you're back on principal-and-interest repayments.

Here's a quick example using 2 home loans that are identical except for the repayments.

Interest-only loans end up more expensive over time

In the scenarios above, opting for interest-only repayments for 2 years will cost you $17,061 extra in interest.

But this is just a simple hypothetical. In reality, interest-only loans have higher interest rates, so you'd likely pay slightly more.

What are the benefits of interest-only loans?

There are 2 major reasons borrowers choose interest-only home loans even though they cost more in the long run.

You get cheaper repayments right now

While principal-and-interest repayments save you money in the long term, some borrowers need a break right now. In this case, interest-only repayments give you some breathing space.

It's a short-term strategy, but if you've lost your job or are dealing with unexpected expenses, interest-only repayments can be a lifesaver.

Investors get tax benefits

Interest-only investment loans are popular with property investors. If you own an investment property, you're allowed to claim any mortgage interest payments as tax deductions. You can't claim any payments off the principal (and homeowners can't claim anything).

Let's say you have an investment property loan worth $400,000. The interest-only repayments are $1,500 per month, while principal and interest repayments are $2,500.

You can only claim the interest part of the payment ($1,500), so you might decide to get an interest-only loan to do the following:

• Pay a lower amount each month.
• Keep your financial obligations low.
• Have a mortgage payment that is fully tax-deductible.
• Use the money you're not paying on the loan principal towards another non-tax-deductible debt, like your own personal home loan.

What are the risks with these loans?

There's nothing wrong with an interest-only loan. You just need to be aware of the potential risks and understand exactly what you're getting yourself into.

Interest-only repayments cost you more

Delaying the repayment of money you've borrowed winds up costing you more. By not paying off the loan principal from day one, you get charged more interest over the life of the loan.

Interest-only loans also have higher rates than principal-and-interest loans.

You don't build equity with interest-only repayments

If your property doesn't grow in value, you won't build any equity in your home if you're not repaying any of the principal. This means from the day you move into the property, you don't own any more of it than the amount you paid for a deposit.

You could even end up in negative equity if the property loses value.

How to compare interest-only home loans

Here's what you need to do to find the best interest-only home loan for you:

• Compare and get a low rate loan. Interest-only loans have higher rates, so it's very important to find a more competitive mortgage.
• Find a loan with the right features. If you have extra cash lying around, you can use a 100% offset account to save on interest charges. But if you're an investor and you have an owner-occupier loan as well, you may want to save your money there instead (because interest on investment loans is tax-deductible).
• Add up the fees. Be sure to add up the cost of application, settlement and monthly fees. Some lenders charge hundreds of dollars in fees, others almost nothing.

Is it harder to get an interest-only home loan?

APRA removed its limits on interest-only lending years ago, but lenders are still extra careful when assessing interest-only borrowers.

You can maximise the chances of getting your application approved by doing the following:

• Saving a bigger deposit. Many banks are more willing to consider an interest-only home loan if you have a lower loan-to-value ratio (LVR). This means having a 20% deposit or higher.
• Making a plan. Lenders will want to know why you want an interest-only home loan instead of a principal-and-interest loan. If you can explain your justification for the loan and demonstrate your investment plans, you'll be in a better position.
• Talking to a mortgage broker. A mortgage broker can help you find a loan that suits your needs and financial situation. The broker vets your application before the lender does, maximising your chances of approval.

Detailed guide to home loan applications

How can I make sure I manage my interest-only loan?

Borrowers with interest-only loans need to pay careful attention to their home loans. To help you stay on top of your mortgage, you should do the following:

1. Understand when the interest-only period ends. If you don't know or can't remember, check with your lender. You can prepare for the end of the interest-only period by using a loan repayment calculator and checking how much your repayments will increase with principal-and-interest repayments.
2. Build up a savings buffer. If you know that your home loan repayments are going to rise when the interest-only period ends, having some extra cash saved up could help you meet the higher repayments.
3. Review your spending. Taking stock of your monthly income and how much you spend helps you keep on track with your mortgage repayments. It makes it easier to find areas you can cut back on too.

Your interest-only mortgage questions answered

• What happens when the interest-only period ends?

  When your loan's interest-only period ends, you start making principal-and-interest repayments. This means the amount you have to repay your lender increases.

  When the interest-only period on your loan ends, you should take the following steps:

  • Review your loan's interest rate and repayments. Don't get caught out when your interest-only period ends. Make sure you know exactly how much you are paying now. Make sure your loan's rate is not too high.
  • If you want to extend the interest-only period, talk to your lender. Just remember that the longer you do this, the more expensive it will be for you.
  • Compare rates and consider refinancing your home loan. Look at your loan and see if there are more competitive loans on the market you can switch to.

• Can I extend the interest-only period?

  This depends on your lender and your own financial circumstances. But it is often possible to extend the interest-only period on your loan.

  You will need to check with your lender.

• Can I refinance an interest-only loan?

  It is possible to refinance to a new home loan during the interest-only periods. Borrowers typically start with an interest-only loan and try to refinance to a principal-and-interest loan.

  Read our guide on interest-only refinancing.

• Why are interest-only rates higher?

  Interest-only loans attract higher interest rates because they are higher-risk loans. Because the borrower is not paying the loan back at first, the lender charges more interest.

• Can I switch to interest-only repayments?

  If you currently have a home loan with principal-and-interest repayments, you may be able to switch to interest-only repayments for a while.

  You'll need to check with your lender. Keep in mind that you will end up with a higher interest rate by doing this.

• Can I sell my home while making interest-only repayments?

  You can sell your home at any time. But if you've never paid off any of your loan's principal, then you don't actually own much of the property.

  You could still sell, but once the loan is paid off, you'd end up with very little money – especially if you had a small deposit to start with.

  Once you factor in your real estate agent's commission (around 2%), lenders mortgage insurance and stamp duty on your next place, you could have nothing left at all.

• Can I get a fixed rate interest-only loan?

  Most interest-only home loans have variable interest rates, but it's possible to get a fixed rate one. With these loans, you know exactly how much your interest-only repayments will be each month during the fixed period.

  The downside? Fixed rate loans are typically higher than variable rate loans. And interest-only rates are higher than principal-and-interest rates. So you're looking at a very high interest rate compared to most loans.

• How long can you have an interest-only home loan for?

  Most lenders allow you to make interest-only repayments for up to 5 years. Some lenders allow it for up to 10 years, but it really depends on your loan and financial circumstances.

Written by

Richard Whitten

Editor

Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio

Richard's expertise

Richard has written 554 Finder guides across topics including:

• Home loans
• Property
• Personal finance
• Money-saving tips