Compare interest-only home loans

Interest-only home loans provide a practical way for investors and borrowers to temporarily lower their mortgage payments. Interested in exploring this option? Start comparing today.

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Home loan comparisons on Mozo - last updated 31 May 2024

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Knowledge Hub

What are interest-only home loans and how do they work?

When it comes to taking out a home loan, you have plenty of choice to make. One of the key ones is what type of mortgage repayments you'd like to make. For this, you have two basic options:

  • Principal and interest (P&I) repayments
  • Interest-only (IO) repayments

For some borrowers, going interest-only for a set period of time is a convenient way to ease themselves into the loan by initially making lower repayments.

During the interest-free period, mortgage borrowers will only be required to pay off the ‘interest’ part of the loan, rather than both the interest and the loan principal (i.e. the loan amount that was borrowed).   

Interest-only mortgages aren’t without their drawbacks though, as they may well prove a more expensive option over the long-run.

Property investors with an interest-only loan
Woman thinking about interest-only home loans

What are the advantages of interest-only home loans?

There are a few key advantages to paying interest-only for a while.

  • Lower initial repayments. The amount you’ll need to pay back over the interest-only period will be lower than it would be if you opted to make principal and interest repayments.
  • Tax incentives for investors. If you’re a property investor you may also be able to benefit from tax deductions associated with the interest-only repayments made on an investment loan.

What are the risks of an interest-only home loan?

There are a few downsides to taking out an interest-free home loan.

  • Higher rates. Lenders tend to charge an interest rate premium to both owner occupiers and investors on interest-only loans, so it’s worth taking that into account when comparing your options. 
  • You’ll have to make up the repayments. While you may be making lower payments during the interest-only period, once that period finishes your repayments are likely to jump.
  • You might not build equity. While your home equity might increase if your property’s value rises, interest-only repayments won't chip away at the loan’s principal, so you might be more vulnerable to a fall in equity, or even negative equity, if values drop. Negative equity is a huge problem is you decide to sell because you return a loss.
Woman shocked about interest-only downsides

How do interest-only mortgage rates compare?

Mortgage lenders tend to charge higher interest rates on interest-only home loans than they do on principal and interest loans. (See more in our home loans statistics page).

That means that if you are thinking about taking out an interest-only home loan, the high interest rate you’ll likely need to pay will be an important factor to weigh up when it comes to calculating your overall costs.  

This rate premium also exists on investment home loans, though it’s much smaller. 

This rate increase also highlights the importance of shopping around. A 1% difference in interest rates can equal hundreds of dollars more a year and tens of thousands over the life of your loan.

You can start comparing interest-free home loan rates yourself by checking out our handy comparison table above, or by plugging in your desired loan amount and loan term at the top of that table to view the monthly repayments required on different home loan offers.

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FAQs

What’s the difference between principal and interest and interest-only repayments?

When you take out a home loan the amount you borrow is known as the ‘principal’ while ‘interest’ is the amount you’re charged by a lender to take out the loan. Your interest is determined by the interest rate.

When you make principal and interest repayments, you’re paying back both of those costs.

When making interest-only repayments, you’re only paying off the interest on your loan, meaning your principal remains the same.  

Can I change my home loan to interest-only?

If you’re experiencing financial hardship or you’re looking to reduce the size of the mortgage repayments you’re making on your mortgage, you may have the option of refinancing to interest-only repayments for a fixed period of time (depending on your lender and loan).

This isn’t as easy as clicking a button though, as you’ll likely need to apply online or contact your lender first to get the process started and find out if you’re eligible. 

Are interest-only home loans more expensive?

Interest-only loans tend to be more expensive than principal and interest loans for both owner-occupiers and investors.

That’s because, on average, lenders charge higher interest rates on these loans, so borrowers will typically pay more interest over the entire life of the loan. 

What happens at the end of an interest-only mortgage?

Once your interest-only repayment period comes to an end, you’ll be required to start making principal and interest repayments, unless you negotiate for an extension with your lender.

Remember, principal and interest repayments will likely be much higher than you’re used to paying, so it may be worth getting your budget in order ahead of time.  

How long can you make interest-only repayments for?

Lenders will only allow borrowers to make interest-only payments on their mortgage for a set amount of time. After all, they want you to repay the loan eventually.

Typically, lenders allow customers to go interest-only for up to five years, though this can be as long as ten years in some cases. 

Can owner occupiers take out interest-only loans?

Interest-only home loans may be a more popular option with property investors, particularly with the potential tax concessions on offer, but there are still plenty of loans available to owner occupiers as well. In fact, you can see for yourself in the comparison table at the top of this page.  

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JP Pelosi

RG146
Managing editor

Jean-Paul (JP) Pelosi is an experienced journalist and editor who has contributed to many of Australia's leading media outlets including The Guardian, News.com.au, Domain.com.au, Investment Magazine and ANZ's Bluenotes. He has also edited news and communications for large financial services companies such as CommBank, Suncorp, Allianz and Amex. He likes a well told story and applying his editorial experience to content that readers both care about and enjoy. JP heads up our writing team.

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Evlin DuBose

RG146
Senior Money Writer

Evlin is RG146 certified for general advice (Tier 2) and has become a leading voice in finance news since joining Mozo two years ago. She is regularly featured in Google's Top Stories alongside major publications like News.com.au and Yahoo Finance, and seasoned journalists. Despite being in the industry for just two years, she is Mozo's go-to writer for all things RBA and her research has been referenced by the Victorian Government. With a Bachelor of Communications degree from UTS, where she won the Dean's Merit Award and acted as the Director of Student Publications.

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