Last Updated: 28th April, 2023

Can I refinance an interest only loan?

Yes, you can refinance an interest only loan.

You can refinance your interest only loan with another lender, or make the switch from principal and interest payments to interest only repayments on your mortgage.

Refinancing to an interest only loan is mostly used by property investors to take advantage of tax benefits.

Property investors can claim the interest as a tax deduction.

Can owner-occupiers refinance to interest only?

Yes, owner-occupiers can refinance to an interest only home loan.

To qualify for a refinance to interest only:

  • Your home loan should be 80% or less of the property value. Some lenders can allow for up to 90%, but strict lending criteria apply.
  • There must be a valid and strong reason for choosing to refinance to interest only. Here are some acceptable reasons for refinancing to interest only.
  • You must be in a strong financial position to afford the principal and interest repayments once the interest only period ends.
  • You should have a strong credit history with timely repayments and a clean credit file.

Would you like some more help to see if you qualify for an interest-only refinance? Our mortgage brokers are here to help. Call us at 1300 889 743 or fill in our free assessment form.

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Are interest rates higher on interest only loans?

While interest only loans often have higher interest rates, the repayments are lower since you are only paying off the interest on your home loan.

Once the interest only period ends, your loan will revert to a lower standard variable interest rate.

One of the ways to get a lower interest rate during the interest only period is to reduce the loan to value ratio to 80%, so you’re not seen as a risky borrower.

You can read our section on ‘Tips for getting a lower interest only rate‘ for more information.

Should I refinance to an interest only loan?

The main benefit you get from refinancing to an interest only home loan is lower repayments.

  • It can be useful if you’re taking out short term loans like a construction loan or bridging loan.
  • Since your repayment is reduced as you’re only paying the interest amount, this could free up cash.
  • It can be a temporary way to manage your cashflow by reducing expenses and managing income reduction.
  • Interest only refinancing loans could be favourable if you’re earning irregular income (bonus, commission, etc.) or working in a non-salaried position like freelance work.
  • You can use any surplus cash to pay down non-deductible debt like the mortgage on your principal place of residence.

However, you should be cautious when refinancing to interest only loans.

  • Your repayment amount will be higher once your interest only period ends as you’ll start paying both the principal and interest.
  • An interest only loan does not lower the principal amount you need to pay to your lender. Since you don’t pay down the principal, you’re not creating any equity in your property.
  • Interest only loans are available for a 5 year period. There are only a few lenders who can offer up to 10 years.
  • If the property loses value, then you run the risk of owing more than it’s worth.

You can use our interest only vs principal and interest calculator to work out, which repayment strategy works best for you.

Why choose a mortgage broker for your interest only refinance?

Our mortgage brokers will discuss your long term plan to assess if you’ll benefit from an interest only refinance.

They have relationships with over 40 lenders and know the refinancing policies of each one of them. They can select the right lender by considering your individual circumstances.

Please call us on 1300 889 743 or fill in our free assessment form to discuss your options today.