Compare interest-only home loans from 6.43%

What is are interest-only home loans?

With an interest-only home loan, mortgage holders are only required to pay off the ‘interest’ part of the loan, rather than the principal and interest (P&I) for an agreed period of time, usually between three to five years.

A typical home loan repayment consists of two parts:

• The principal - the amount you borrow
• The interest - the amount a lender will charge you on your outstanding balance

For some borrowers, having an interest-only home loan is a suitable way to ease themselves into the loan by making the bare minimum repayments. What this means is that your home loan balance won’t reduce during the interest-only period since you’re technically not paying off the amount you borrowed. Additionally, interest rates for interest-only home loans tend to be higher than P&I home loans.

If you’re considering an interest-only home loan, you’ll want to do some research to find out all the elements involved and ultimately whether it’ll suit your needs and circumstances.

How to compare interest-only loans

Generally, lenders tend to charge higher interest rates on interest-only home loans compared to P&I loans.

If you’re unsure whether an interest-only loan or principal and interest loan will work best for you, compare the interest rates that are available on the market with both payment types.

To get you started, check out our handy comparison table above with some of the best interest-only loans on the market. Or, insert all the relevant information (loan amount, loan term, payment type) into our mortgage repayment calculator to find out your estimated repayments, the total principal paid, and the total interest paid. From there, you can make a decision regarding whether interest-only or principal and interest repayments are the right option for you.

If you have determined that you want to go the interest-only route, you will need to compare the options available to you. To do so, you must consider the following:

• Interest-only period - Check how long you can keep paying interest-only. Usually, lenders offer an interest-only period of up to five years.
• Comparison rate - Ensure that you check the comparison rate of your options to determine their true cost.
• Features - Ask your lender what loan features you can get with your interest-only loan. Will you be able to access an offset account? Are you allowed to make extra repayments to cover the principal part of the loan?

What happens when the interest-only loan period expires?

Like anything, an interest-only home loan doesn’t last forever.

When the time comes, your interest-only loan will automatically roll over to P&I (principal and interest) repayments. This means you’ll start paying off the amount you borrowed as well as the interest.

There are three options you can follow if your interest-only loan period is ending.

1. Extend the interest-only period: If possible, your lender may be willing to extend your interest-only period to keep you as a customer.

2. Get ready for P&I repayments: If you’re ready to make the switch to P&I repayments, ride out the expiry of the interest-only period and settle into P&I repayments with no hassles.

3. Refinance: Maybe you’ve done some research and seen a better rate on the market. If so, you might want to look at refinancing your home loan with your current lender or a potential new one to take advantage of any beneficial features.

How long can you take out an interest-only loan for?

On average, lenders offer interest-only periods between three to five years. However, if you have a chat with your lender, they may be able to offer you up to 15 years but this is generally reserved for investors.

What are the benefits and disadvantages of an interest-only home loan?

No matter what type of home loan you decide to take out, it’s always a good option to weigh up the pros and cons involved. Below is a list of some of the benefits and risks you could encounter when taking out an interest-only home loan.

The advantages of interest-only home loans

• Lower repayments: The lower initial payments of an interest-only loan can make it easier for borrowers to save more, pay off outstanding debts, or purchase a property sooner. Interest-only home loans also benefit buyers who are experiencing financial hardship or a temporary reduction of income. This is possibly the biggest appeal for interest-only loans.
• Tax incentives for investors: If you’re an investor, you could claim higher tax deductions from an investment property. According to the ATO, investors can “claim a deduction for the interest charged on the loan or a portion of the interest.”

The disadvantages and risks of interest-only home loans

The biggest risk you might have to take if you get an interest-only loan is the possible repayment shock once the interest-only period expires. Here are some disadvantages and risks of getting an interest-only loan:

• Higher interest costs: You end up paying more in interest over the life of your loan than you would with a P&I loan. To explain this further, with a P&I loan, as the principal amount decreases, so too does the amount of interest being charged.
• Generally higher interest rates: When you’re conducting research on an interest-only home loan, you may notice that they generally have a higher rate of interest compared to a P&I loan.
• Less equity buildup: With an interest-only loan, you may not be building any equity in your property. If the value of your property was to possibly fall, you could end up owing more to the lender than what the property could sell for if you had to sell for any reason