What is an interest-only home loan?
An interest-only (IO) home loan lets you only repay the interest that accrues on the amount you borrowed for a set period of time. You don’t have to repay any of the principal (the loan balance) during that period, which can help reduce the size of your repayments. However, making interest-only repayments can see you paying more interest over time, as the home loan balance will stay higher for longer.
The maximum interest-only loan period offered by Australian lenders is typically five years for owner-occupiers, while for investors it tends to be longer, sometimes up to 15 years. After this period, the loan reverts to principal and interest repayments.
Construction loans and bridging loans are common types of property finance that usually come with interest-only repayments for part of the term.
How does an interest-only home loan work?
During the interest-only period, you might find your regular repayments are lower, since you’re not repaying any of the principal. Once it’s over, you’ll switch to principal and interest repayments.
Borrowers often enter interest-only periods at the start of their loan, but some lenders may offer the ability to switch between interest-only and principal and interest throughout the life of the loan, up to the maximum total interest-only period.
In most other respects, interest-only loans work the same as standard home loans.
You’ll have regular minimum repayments, be able to choose between fixed and variable rates, and the maximum loan term is usually still up to 30 years (including the interest-only period).
Best interest-only home loans
Most major banks and many smaller lenders offer interest-only loans. The best interest-only option for you depends on:
- Interest rates: Like rates on principal and interest home loans, rates on interest-only mortgages can vary, so it’s important to shop around and compare your options.
- Fees: While a loan’s interest rate is important, some lenders compensate for lower rates with higher establishment or ongoing fees. Sometimes there may also be extra fees for making interest-only repayments. The comparison rate can help compare the ‘true’ cost of a loan, taking these extra charges into account.
- Features: Some lenders offer features like offset accounts on interest-only loans. This could lower your repayments even further, although you may have to pay a higher rate or extra fees.
If you’re considering taking out a home loan with interest-only repayments, you might want to consider Canstar’s Home Loan Award winners, which have been recognised to offer outstanding value to mortgage borrowers.
Canstar’s 2026 Home Loan Awards: Winners of our Outstanding Value Awards for home lenders: Australian Mutual Bank, BankVic, Hume Bank, Pacific Mortgage Group (PMG), People’s Choice (now part of People First Bank), Unity Bank, and Up Bank
Who are interest-only home loans suitable for?
Interest-only loans tend to be particularly appealing to property investors. Keeping non-interest costs low is often a particular priority for investors, and interest-only repayments can free up cash for other costs or investments. Investors may also be able to claim interest as a tax deduction, which isn’t the case for principal repayments.
Interest-only home loan repayments can also be appealing for owner-occupiers looking to save a bit of money. Finally, according to Moneysmart, interest-only repayments can be useful if you need to pay off more expensive debts.
Am I eligible for an interest-only home loan?
Individual lenders will assess who is eligible for their interest-only home loans, but generally would apply similar criteria to their other loans. Interest-only loans are sometimes seen as riskier, so lenders may apply stricter checks on borrowers.
Your eligibility may depend on:
- Your financial situation: Even if you’re already making repayments on a principal and interest loan, lenders will usually make another assessment of your income, debts, assets before letting you switch to interest-only.
- How long you want to go interest-only for: Lenders generally have a maximum amount of time you can make interest-only repayments over a loan term.
- Your loan-to-value ratio (LVR): Some lenders won’t allow you to go interest-only if you have an LVR above 80%, due to the risk of negative equity if the value of your property drops.
Are interest-only home loans more expensive than principal and interest loans?
While interest-only repayments may reduce how much you pay towards a mortgage each week, fortnight, or month, an interest-only period usually means paying more in the long run.
Interest is calculated based on how much you owe. The more debt is outstanding, the more interest you’ll pay, so not paying anything back for a few years typically means accruing more interest.
Rates are also normally slightly higher on interest-only home loans compared to their principal and interest counterparts. For some borrowers, having extra cash for the interest-only period is worth it, for others it’s not.
What are interest-only home loan rates?
The rates on interest-only home loans are typically higher than those on loans with principal and interest repayments. This is the case for both investors and owner-occupiers.
According to Canstar data, the average interest rate on an owner-occupier, principal and interest home loan in August 2026 was 6.63% p.a., compared to 7.27% p.a. or similar loans with interest-only repayments. For investors, the average principal and interest mortgage rate was 6.89% p.a. and 7.15% p.a. for interest-only.
Note that we arrived at these figures by considering a loan amount of $600,000 and an 80% LVR; we didn't consider introductory and first home buyer-only loans in our calculations.
If you’re in the market for an interest-only home loan, you can find rates available on the market right now by following the prompts above or browsing products displayed on the table on this page.
