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Interest Only Home Loans

An interest only home loan works differently from a standard home loan.

By removing the principal from the equation, you can reduce the size of your repayments significantly. This can be highly beneficial, especially if you’re looking to invest in property or are building a property.

Despite this, there are a few things that need to be considered before you opt for an interest only period.

What is an interest only home loan?

A typical home loan repayment includes the interest and a part of the principal amount. This is known as a principal and interest (P&I) payment.

However, on an interest only home loan, you’re only paying off the interest on the loan. This can minimise the size of your repayments significantly.

Despite this, it should be noted that you aren’t actually paying off the loan during the interest only period.

Is it suitable for me?

This type of loan is more suitable for property investors. Investors often choose interest only so that they can put their money to better use elsewhere. For example, to buy more investment properties.

Also, investors often prefer to make as small repayments as possible. This is because an investor will lose some of their negative gearing benefits if they pay off their loan early.

Homeowners rarely choose this because it isn’t suitable for most of them.

However, if you have a car loan, a credit card and a home loan then it makes more sense to pay off the biggest debt first. This is the reason some people make interest only payments on a loan and focus on paying off the credit card first.

Some homeowners also switch to interest only for a short period of time because of financial hardship.

Not sure if you qualify for an interest only home loan?

Speak with one of them on 1300 889 743 or complete our free online assessment form and find the right option for you.

How do interest only home loans work?

On an interest only home loan, you only pay the interest portion on the loan for a certain period of time. This can significantly reduce the size of the repayments you make over this period.

How often do I need to make the repayments?

Normally, banks don’t allow weekly and fortnightly payments if you’re making interest only payments. This is because weekly and fortnightly interest only payments are usually considerably small.

Generally, you’ll be required to make standard monthly payments.

How can an offset account help me?

Getting an offset account is a great strategy from a tax perspective. A loan with an offset includes the standard loan account linked with an offset account.

An offset account is a special account linked to the loan where you can make additional repayments to your loan account. It earns no interest, however, the bank will take the balance into account when assessing your loan interest.

This means that if you have a $800,000 loan and you’ve put $300,000 in the offset account, the bank will calculate interest on just $500,000. This can make a huge difference on the tax amount.

To learn more about offset accounts, you can speak with one of our mortgage brokers on 1300 889 743 or complete our free online assessment form.

What do I need to consider?

Interest only home loans aren’t for everyone. You need to weigh the pros and cons of choosing interest only payments before you decide to go for it.

For instance, it can be highly suitable for property investors, however, it may make no sense for someone looking to buy an owner-occupied property.

It’s essential that you speak with your accountant or a professional financial advisor before your decide to make interest only repayments.

What should you be careful of?

Some things that you may need to consider are:

  • You’re not actually paying off the loan: Although the size of your repayments will be smaller, you’re only paying off the interest portion on the loan. You may have a tough time once the interest only period ends and you have to start making large principal and interest payments.
  • You’ll need to refinance: Interest only periods last for a short while, usually 5 years. You may have to refinance to another lender if you wish to continue making this method of payment.
  • You’re not building equity: These loans can be a much riskier than P&I loans as you won’t be building equity in the property. This means that if the value of the property decreases, you may end up with negative equity. Rise in interest rates can mean higher payments for the same value property.

Interest only home loan FAQs

How long is the interest only period?

The interest only period normally lasts for 5 years. This means that you’ll only need to pay the interest portion of the repayments until the term ends.

Can I extend this period?

Lenders will allow you to extend the interest only term by another 5 years depending on how regular you are with your payments. A handful of lenders may even consider extending the period by 10 years.

The banks have a minimum term, typically up to 10 years of the 30 year loan term.

Am I allowed to make extra repayments?

Yes, banks usually allow you to make additional repayment on your loan.

Making higher repayments can help you reduce the size of your loan much faster. It’s also an effective way to minimise the loan term and reduce the interest that you’ll pay.

You can use this to your advantage by refinancing to a lower interest rate before you start making those extra repayments!

What happens when the interest only term expires?

After the interest only term finishes, you’ll go back to making standard loan repayments. This means that your repayments will include the interest as well as part of the principal.

Some lenders will allow you to refinance to another lender to get a new term or period!

To find out if you’re qualified to refinance, you can speak with one of our experienced mortgage brokers. You can reach them on 1300 889 743 or by completing our free online assessment form.