Interest only home loan rates
The table below displays a selection of home loans from our Online Partners where borrowers can make interest-only repayments.
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What is an interest-only home loan?
An interest-only (IO) home loan is a lending arrangement where you only repay the interest on the amount you have borrowed for a set period of time. You don’t have to repay the principal (the loan amount) during that period, like you would with a principal and interest (P&I) loan.
The maximum interest-only loan period is typically five years for owner-occupiers, but may be longer for investment loans. After this period, the loan reverts to principal and interest repayments.
How does an interest-only home loan work?
With an interest-only home loan, your repayments are lower than they would be on a principal and interest loan during the interest-only period, but would go up once you start paying off the principal component of the loan.
It’s common for the interest-only period to come in one chunk at the start of the loan term, but some lenders may offer borrowers the ability to switch between interest-only and principal and interest repayments throughout the life of the loan, up to the maximum total interest-only period.
In most other respects, interest-only loans work in much the same way as other kinds of home loan, with regular repayments, fixed and variable interest rate options and a loan term of up to 30 years typically (including the interest-only period).
Construction loans and bridging loans are other types of property finance that are commonly based on interest-only repayments for a part of the term.
Who uses interest-only home loans?
Interest-only loans tend to be particularly appealing to property investors and are generally more commonly available to these borrowers. This is because keeping non-interest costs low is often a particular priority for investors to enable them to free up cash for other investments.
But interest-only home loans are also available to owner-occupiers and may be appealing to people who need to free up cash in the early part of their loan term. Moneysmart explains that this can enable people to save some money to pay off more expensive debts, such as a credit card balance.
Are interest-only home loans more expensive than principal and interest loans?
Generally speaking, interest-only home loans work out to be more expensive than principal and interest loans in the long run. This is due to the higher interest rates charged on average on interest-only loans, and the fact that you are being charged interest on the whole loan amount during the interest-only period. In contrast, with a principal and interest loan you would start paying down the balance gradually from the start and would therefore be charged interest on a lower amount as time goes on.
Frequently Asked Questions about Interest-Only Home Loans
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About our home loan experts
Alasdair Duncan, Senior Finance Journalist
Joshua Sale, Group Manager, Research & Ratings
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