Compare interest only home loans from 5.74%

What is an interest-only home loan?

A typical home loan repayment consists of two parts:

• Principal
  The portion that goes towards repaying the borrowed funds

• Interest
  The portion that's charged to a borrower utilising the funds

Mortgage holders with an interest only home loan are only required to make payments to cover the 'interest' part of the loan.

For that reason, the repayments on an interest only mortgage are generally smaller than than they would be if a borrower was making principal and interest (P&I) repayments.

Typically, a bank or lender will only allow a borrower to make interest only repayments for an agreed period of time, usually between three to five years.

On top of that, interest rates for tend to be higher on interest only home loans than on P&I home loans.

If you're considering taking on an interest only home loan, it's worth doing your research on all that's involved before deciding whether it will suit your needs and circumstances.

Interest only home loans for investors

Interest only home loans are generally the domain of property investors. As interest on an investment home loan is tax deductible, an investor might expect to maximise their cash flow in the short term by making interest only repayments and grow their capital wealth in the long term thanks to rising property prices.

See also: What tax deductions can you claim on your rental property?

Interest only home loans for owner occupiers

On the other side of the coin, some borrowers might turn to an interest only home loan in an effort to minimise their repayments when experiencing hardship. There is a downside to doing so: the balance of their home loan will stay the same during an interest-only period, meaning they'll be left with more to repay later.

Interest only home loans might also prick the ears of a 'house flipper' - one who buys a less-than-perfect abode and renovates it to some degree before selling it for (hopefully) more than they paid. Since such a homeowner mightn't plan to ride out the capital gains wave, they could choose to funnel extra cash flow into repairs and renovations rather than pay off their debt.

What happens when an interest only loan expires?

Like most anything, an interest only home loan won't last forever.

When the time comes, your interest only loan will automatically roll over to principal and interest repayments. At that point, you'll start paying off the amount you borrowed, as well as the interest.

If your interest only loan period is ending, there are three main options you might consider going forward:

1. Extend the interest-only period
   Your lender may be willing to extend your interest only period in order to keep you as a customer.

2. Prepare for P&I repayments
   You might wish to get your ducks in a row ahead of making the switch to principal and interest repayments.

3. Refinance
   If you've done your research and found a better rate on the market, you might want to think about refinancing your home loan in order to extend your interest only period or secure a lower interest rate (or both).

How long does an interest only period last?

Lenders typically offer interest only periods of between one and five years.

However, if you have a chat with your lender, they may be able to offer you a longer interest only period. Though, long stints are generally reserved for property investors.

Pros and cons of interest only home loans

No matter what type of home loan you decide to take out, it's always a good 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.

Advantages of interest only mortgages

• Lower repayments
  Interest only repayments will be lower than principal and interest repayments on the same loan, potentially offering borrowers greater cash flow. Interest only loans can also help homeowners experiencing financial hardship or a temporary reduction of income.

• Tax incentives for investors
  Property investors can deduct home loan interest from their taxable income, which might attract many to interest only home loans.

Disadvantages of interest only mortgages

• Repayments will eventually revert
  An interest only home loan can only last for so long, and a borrower will need to be confident they can manage principal and interest repayments when it expires.

• Higher interest rates
  Interest only home loans generally attract higher interest rates than traditional home loans.

• More interest to pay
  A borrower with an interest only home loan will also end up paying more interest over the life of their loan than they would otherwise. This is because, when a borrower repays a portion of their principal balance, they no longer pay interest on that portion.

• Less equity buildup
  A person making interest-only home loan repayments won't be gradually gaining ownership of their property from their lender. This also means that if the property's value falls, they could find themselves owing more than the property is worth more quickly than their principal-and-interest-paying peers.

How to compare interest only home loans

The first step of comparing various home loans is always the same: think long and hard about your property market intention and strategy before identifying a home loan that will align with it.

For instance, if you wish to buy an investment property in an area you believe will experience notable capital growth in the near term, but don't necessarily value paying down your principal balance, a low-rate interest only home loan might be right for you.

However, if you're an owner occupier who eventually wants to own your home outright, making principal and interest repayments is likely a better option. You might even seek out a home loan that allows extra repayments to speed up the process.

It's worth remembering that lenders generally charge higher interest rates on interest only home loans than they do on traditional mortgages.

You can turn to our handy comparison table above to compare many of the most competitive interest rates available on the market right now.

Once you've worked out the interest rate you might be able to secure, use our mortgage repayment calculator to estimate the size of your repayments and the impact an interest only period would have on your finances.

From there, you can make an informed decision on whether one home loan is more suited to your needs than another.