How interest only works
For a set period, you pay only the interest. After that, the loan switches to principal and interest over the remaining term, which is shorter, so repayments rise more than most people expect.
An example. On a $600,000 loan at 6% over 30 years, interest only repayments are about $3,000 a month. After five years, principal and interest over the remaining 25 years is about $3,870 a month. Paying principal and interest from the start would have been about $3,600 a month.
Who it suits
- Investors. Lower repayments can help cash flow while you keep money in an offset or pay down non-deductible debt first. Talk to your accountant about the tax side.
- Short-term situations. Parental leave, a build, a business start-up or a bridging period, where lower repayments buy time.
- Not usually long-term homeowners. On your own home, you pay more interest overall and build equity more slowly.
What lenders look at
- Interest only periods are usually up to five years for a home, and some lenders allow longer for investors
- Rates are often higher than for principal and interest
- Lenders assess whether you can afford the higher principal and interest repayments later
- Extending the interest only period usually needs a new assessment
When your interest only period ends
Plan for it a few months ahead. You can switch to principal and interest, apply to extend, or refinance, which is often a good time to review the rate as well.
Questions people ask
Is interest only or principal and interest better?
Principal and interest builds equity and costs less overall. Interest only lowers repayments for a while, which can suit investors or short-term situations.
How long can a loan be interest only?
Usually up to five years for an owner-occupied loan. Some lenders allow longer for investment loans.
What happens when my interest only period ends?
The loan switches to principal and interest over the remaining term, so repayments rise. You may be able to extend or refinance.
Can I get interest only on my own home?
Yes, with many lenders, but you'll usually pay a higher rate and need a reason it suits you.
Do lenders still offer interest only home loans?
Yes. Most lenders offer interest only, usually for up to five years, though often at a higher rate than principal and interest.
