The interest-only home loan option is an attractive choice for borrowers who would like to enjoy lower repayments for a certain period of time. This home-loan option is appealing to two groups of property buyers: investors and first-home buyers.

First-home buyers often get interest-only loans to help them manage and adjust their finances as they settle into homeownership. Interest-only loans allow investors to take advantage of taxation benefits.

## How interest-only loans work?

There are two components to a mortgage repayment: the principal amount of your loan and the interest charges. If you are on an interest-only loan, your regular repayments will only cover interest charges for a certain period, which usually lasts for up to five years. Over the interest-only period, the principal amount of your loan remains untouched.

When your interest-only period ends, your loan will revert to a principal-and-interest loan, which means that your repayments from then on will be higher. It is only then that you will be able to start repaying what you actually owe.

## What are the benefits of interest-only loans?

### 1. Enjoy lower repayments

Whether you apply for an interest-only loan or you switch to interest-only payments, you will be able to trim the amount of your repayments. As mentioned earlier, your repayments over the interest-only period only cover the interest charges.

Here's an example: for a \$425,000 mortgage over 25 years with an interest rate of 2.85%, your principal-and-interest repayments will approximately be \$1,982 monthly. You can use this formula to estimate your monthly interest charges:

Loan Amount x Mortgage Rate / 12 months = Monthly Interest Charges

Using the formula above, here's how much you are going to pay monthly if you decide to go interest-only for the first five years of the loan:

\$425,000 x 2.85% / 12 months = \$1,009.38

### 2. Take advantage of tax deductions

Interest-only loans allow investors to maximise their tax-deductible expenses. Given that the interest charges on investment loans are tax-deductible, investors often get interest-only loans to claim higher tax deductions.

With lower repayments, investors are able to free up extra money that they can use to pay the mortgage on their own home or fund other investments. They can also use the extra fund to non-tax-deductible personal loans.

### 3. Manage expenses

Interest-only repayments allow first-home buyers to adjust their finances and manage their expenses during the first few years of the loan. The interest-only period provides these buyers with the necessary breather after paying the costs and fees involved in the home-buying process and loan application.

## Before you get an interest-only loan…

You have to remember that without proper planning, an interest-only loan could actually put you in a difficult situation in the long-run. At the end of your interest-only period, you will be paying significantly more, and if you are not able to use the period to take care of your other financial commitments, then you could end up in a debt trap.

Reach out to a mortgage professional to help you plan ahead before you get an interest-only loan. Visit Your Mortgage Broker to speak to our home loan specialist.

Buying a home or looking to refinance? The table below features interest only home loans with some of the lowest interest rates on the market for owner occupiers.

Lender

Variable

Variable

Variable

#### Solar Investor Loan (Interest Only) (LVR < 90%)

Important Information and Comparison Rate Warning

Base criteria of: a \$400,000 loan amount, variable, fixed, principal and interest (P&I) & interest only (IO) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a \$150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of December 2, 2023.