Quick answer
An interest only home loan means you pay only the interest for an agreed period, often up to five years, so the amount borrowed does not shrink. When the period ends, repayments switch to principal and interest and usually rise. They can suit investors, builders and short-term needs. Ownright Custom Finance arranges interest only loans Australia-wide.
Key points
- Repayments cover interest only for the agreed period
- The loan balance does not fall during that time
- Repayments typically rise when the period ends
- Investors, builders and bridging situations often use them
- Suits
- Investors, builders, short-term needs, cash-flow planning
- Security
- Residential or investment property
- Interest only period
- Set by the lender, commonly a few years
- Australia-wide
- Yes
What is an interest only home loan?
An interest only home loan lets you pay just the interest on your debt for an agreed period. The amount you borrowed stays the same, so it never gets smaller while you are in the interest only phase. At the end of the period the loan switches to principal and interest, and repayments typically step up because you now have to repay the debt in a shorter remaining term.
The maths is simple, and so is the catch: lower repayments now, higher repayments later. For the right purpose that is a perfectly sensible trade. For the wrong one, it can feel like running on a treadmill that suddenly speeds up.
Who uses interest only loans?
- Property investors who want to maximise cash flow and keep deductible interest high
- Owner-occupiers renovating or building who need breathing room
- Buyers who have bought before selling and expect a sale to clear debt
- Business owners managing a lumpy income year
- Retirees or near-retirees with a defined exit plan
- Borrowers using the loan as a stepping stone to a different structure
Investors often like the flexibility, and the ATO provides general information on deductible rental property expenses, with your accountant best placed to confirm how it applies to you.
Interest only versus principal and interest
| Feature | Interest only | Principal and interest |
|---|---|---|
| Early repayments | Lower | Higher |
| Balance during period | Stays the same | Gradually falls |
| Equity growth | Only from property value changes | From repayments and value changes |
| Cost over the loan’s life | Often more overall | Often less overall |
| Best for | Short-term flexibility, investors | Long-term owner-occupiers |
Our guide on interest-only versus principal and interest loans goes through the numbers conceptually without making promises about rates.
What do lenders look at for interest only?
Purpose. Owner-occupiers need a clear reason, while investors have an easier path. A renovation, construction or temporary income gap are all reasons lenders understand.
Serviceability after the switch. Lenders typically test whether you could afford the higher principal and interest repayments, not just the interest only ones. Our serviceability guide explains the idea.
Equity. A lower loan-to-value ratio generally gives lenders more comfort. See what LVR means.
Exit plan. Whether the debt will be cleared by sale, refinance, bonus income, super or ongoing principal payments after the period.
Fixed, variable and offset options
You can usually pair interest only with different rate structures. A fixed or variable loan decision changes how predictable repayments are, and an offset account can reduce the interest you pay while keeping savings accessible. Each combination suits a different borrower, so we map them against your goals before picking one.
When interest only is used for building and bridging
Construction loans often run interest only during the build, with interest charged on the amount drawn so far. Our construction loan page explains progress payments. Short-term private lending can also be interest only for a defined term when the exit is clear, as covered on interest only private loans.
How Ownright arranges interest only loans
Trevor Scott often says that interest only is a tool, not a trick. We start by asking what you want it to do. Free up cash for a renovation? Hold an investment for the long term? Bridge a gap until a sale? Then we work out how the loan looks on the day the interest only period ends.
If a bank has declined you, we look at other lenders and structures. Self-employed borrowers, those with a past default or buyers with unusual income may find that a specialist lender sees the case differently. Our page on investment property loans explains more for investors. We work in every state and territory.
An illustration
Illustrative scenario only. An investor owns two rentals and wants to buy a third without choking cash flow. A broker might compare an interest only period on the new loan with principal and interest on the existing ones, run both against a likely repayment change in future, and set up an offset account so spare cash reduces interest.
Mistakes to avoid
- Ignoring what repayments will be after the period ends
- Using interest only to stretch into a property you could not otherwise afford
- Forgetting that the balance has not fallen when you come to sell or refinance
- Not asking about extra repayment options
- Skipping tax advice from your accountant
Is interest only a good idea for owner-occupiers?
It can be, in the right season of life. A family building a home, someone in the middle of a career change or a buyer waiting on a sale may value breathing space for a while. The risk is drifting into the end of the period without a plan, then facing a large jump in repayments with fewer years left to pay off the debt.
Lenders know this, which is why owner-occupier interest only loans are generally assessed more carefully than investor ones. They want to know why you need the period and what changes at the end. A clear, believable answer goes a long way, and we help you write it down.
What can you do before the interest only period ends?
You have more choices than waiting for the letter. You can start making voluntary extra repayments while you still can, build cash in an offset account, ask your lender about extending the period or look at refinancing to a new loan. Each has pros and cons, and the best choice depends on your income and plans at that point. Our page on home loan refinance shows how switching works, and we often diarise the end date with clients so there are no surprises.
Documents to have ready
- Photo ID
- Payslips, tax returns or business financials
- Statements for all existing loans and cards
- Rental income evidence for investment properties
- Contract of sale or property details
Our loan readiness checklist is a helpful starting point.
Want to compare interest only with other options?
Send us your plan and we will show how an interest only structure would work in your case, or phone the team on 03 7043 7233.
Looking for an interest only home loan that fits your plan?
Sounds like you want an interest only home loan with a clear path afterwards. We are the lending experts in structuring these loans properly, so click the button below and see if you qualify.
How it works, step by step
- 1
Step 1
Tell us the purpose of the loan and how long you want lower repayments.
- 2
Step 2
We check which lenders offer the period you need for owner-occupiers or investors.
- 3
Step 3
We test what repayments look like after the interest only period ends.
- 4
Step 4
We lodge the application and help you plan for the switch.
Frequently asked questions
How do interest only home loans work?
During the interest only period your repayments cover the interest charged and nothing towards the amount borrowed, so the balance stays the same. Once the period ends, the loan generally reverts to principal and interest over the remaining term, which means higher repayments because the same debt is repaid over fewer years.
How long can an interest only period last?
Lenders set their own limits, with periods of up to five years commonly offered and some going longer for certain borrowers or purposes. Terms depend on whether the property is owner-occupied or an investment, and on your finances. We check what is available for your situation before you commit.
Are interest only loans only for investors?
No. Investors are the best known users, but owner-occupiers use them during renovations, building projects, a sale and purchase overlap or a temporary income dip. Lenders usually want a clear reason and a plan for the switch. We can help present that in a way that makes sense.
Can I make extra repayments on an interest only loan?
Usually yes on variable loans, which lets you pay down principal if you want to. Fixed loans may limit extra payments. An offset account can also reduce interest without locking money away. Ask us about features before choosing, as they differ between lenders.
What happens when the interest only period ends?
The loan reverts to principal and interest, so repayments increase. You can often refinance, ask to extend the interest only period, make extra repayments in advance or sell. Lenders may reassess you at that point. We encourage you to plan ahead rather than wait for the notice.
Can I get an interest only loan with bad credit or low-doc income?
Sometimes, although choices narrow. Specialist and non-bank lenders may allow it with a higher deposit or stronger security. We look at the whole picture, including income type, equity and purpose, before approaching lenders.