Lowest interest-only loan rates in November 2024
We’ve rounded up the lowest interest-only home loan rates available in November 2024:
- Lowest variable interest-only rate: 5.75% p.a. (special offer), comparison rate 5.88% p.a. (max 60% LVR). Arab Bank Australia.
- Lowest fixed interest-only rate: 5.59% p.a., (fixed for 2 years) comparison rate 6.45% p.a. (max 80% LVR). Queensland Country Bank.
- Lowest fixed interest-only rate (investor): 5.79% p.a., (fixed for 2 years) comparison rate 6.04% p.a. (max 80% LVR). Easy Street Fin Services.
- Lowest variable interest-only rate (investor): 5.94% p.a., comparison rate 6.00% p.a. (max 70% LVR). Police Credit Union.
How do interest-only home loans work?
With an interest-only home loan your repayments only go towards paying off the interest charged on your loan for a set period. You won’t be paying off the home loan itself (the principal) during the interest-only period.
Because of this, repayments on an interest-only home loan will generally be lower than repayments on a comparable principal and interest (P&I) home loan during the interest-only period. They will be higher when you eventually start repaying the loan itself (not just the interest.
Here’s a rundown on how interest-only home loans work:
- The interest-only period for owner-occupiers is generally limited to a duration of 1-5 years, but for investment property loans, it can be up to 10 years.
- Interest-only loans are popular among investors because they can free up cash flow, and the interest repayments may be tax deductible.
- The interest-only period is usually at the start of the loan term, but not always.
- Some lenders set a maximum duration – e.g. five years – that can be taken consecutively as an interest-only period, even if the overall interest-only allowance is longer.
- At the end of the interest-only period, your home loan will revert back to principal and interest repayments (and your repayments will increase).
- With a variable interest-only home loan your repayments could go up or down, or you could choose a fixed rate home loan so the repayments don't change.
- Interest-only home loans generally have higher interest rates than P&I home loans.
How interest-only loans affect your borrowing capacity
Mansour Soltani, Money's Home Loans Expert
“Interest-only loans have stricter eligibility rules because lenders assess your borrowing capacity over a shorter term. For example, if you apply for a 30-year home loan, with a 5-year interest-only period, lenders will assess it as a 25-year loan (your remaining P&I term). This can significantly reduce your borrowing power because your loan principal has to be repaid over a shorter term.”
Mansour Soltani, Money's Home Loans Expert
Based on Money’s analysis, interest-only loans make up about 10% of owner-occupier & 40% of investor home lending by value in Australia.
Interest-only loans vs principal & interest
Interest-only (IO)
You’re only paying interest on the loan for a fixed period.
Lower repayments during the interest-only period, followed by higher repayments once it ends.
Higher rates of interest on average compared to principal and interest loans.
You’ll pay more interest overall.
Principal & interest (P&I)
You’re paying off both the loan amount and the interest charged by the lender.
Repayments stay steady throughout the loan, (subject to interest rate changes on variable rate home loans).
Usually lower interest rates available.
You’ll pay less interest overall.
Interest-only home loan cost comparison
| Principal & interest home loan | Interest-only home loan (1-year) | Interest-only home loan (5-year) | |
|---|---|---|---|
Loan amount | $600,000 | $600,000 | $600,000 |
Interest rate | 6.00% p.a. | 6.00% p.a. | 6.00% p.a. |
Loan term | 30 years | 30 years | 30 years |
Monthly repayment during interest-only period | $3,597 | $3,000 | $3,000 |
Monthly repayment after interest-only period | $3,597 | $3,642 | $3,866 |
Total interest cost over the life of the loan | $695,029 | $703,426 | $739,743 |
Extra interest paid over the life of the loan | N/A | $8,397 | $44,714 |
Expert tip: Think about your interest-only 'exit strategy'
Mansour Soltani, Money's Home Loans Expert
“If you’re considering an interest-only home loan, you need to know what your plan is for transitioning to principal and interest repayments so you're actually paying down the debt. Depending on your age, staying on interest-only for a long time could mean you still have a big home loan debt as you approach retirement.”
Mansour Soltani, Money's Home Loans Expert
Reasons you might choose an interest-only home loan
1
Construction loan
When costs are high during the construction of a new home, borrowers may benefit from lower repayments until construction is complete. Having interest-only repayments on your construction loan can be a good option, especially if you’re still renting during the build to manage cash flow.
2
Bridging finance
If you buy a new home before you sell your current one, you can get a bridging loan with interest-only repayments to make repaying two loans (your bridging loan and the loan you have for your existing property) more manageable.
3
Property investment
Some investors choose interest-only repayments on their investment property home loan to minimise initial costs and free up cash to invest elsewhere. Interest may be a tax-deductible expense for some investors, so paying more interest overall on a loan may be less of a concern.
4
If you need reduced repayments for a period
If your circumstances change and your household’s income decreases (for example, after the birth of a child) interest-only repayments can provide temporary relief. An interest-only period is a potential alternative to taking a ‘repayment holiday’ on your loan where your repayments would be paused entirely. If you’re not paying back anything at all, interest will compound on your loan (i.e. you’ll be charged interest on the interest already added to your balance).
5
Paying off other debt
If you have other debt with higher interest rates than your home loan, such as credit cards or personal loans, switching to lower interest-only repayments on your home loan can temporarily free up money to repay that debt.
Interest-only home loans pros & cons
Pros
- It generally doesn't cost to switch to interest-only repayments and back to P&I repayments
- You can still make extra repayments to reduce your loan balance during the interest-only period
- Making interest-only repayments frees up cash flow to use elsewhere or invest
- You can choose the duration of your interest-only period based on your financial situation
Cons
- Interest-only mortgages generally have higher interest rates than P&I home loans
- Your home loan repayments will be higher after the interest-only term
- You don’t build equity in your property with interest-only repayments (because you’re not paying down what you owe)
- Stricter lending criteria apply for interest-only loans
Switching from interest-only to principal and interest repayments
One of the biggest risks with interest-only loans is the increase in repayments when the loan reverts to principal and interest at the end of the interest-only period.
In some cases, the repayment amount will increase significantly, which can cause financial strain if you’re not prepared for it.
To get ready for your repayment amount to increase after your interest-only period ends you can:
- Make sure you’re aware of when your repayment will increase and by how much when the loan reverts to principal and interest.
- Make room in your budget to accommodate the extra cost a few months in advance of when your repayments switch.
- Save money during the interest-only period, if possible. This can help ease the financial pressure when your loan reverts to principal and interest repayments.
- Talk to your lender and ask for support in advance of the switch to principal and interest repayments if you can’t afford the repayment increase.
- Consider extending your interest-only period if that's an option, or consider refinancing your home loan with another lender if you find a better deal and are eligible.
Applying for an interest-only home loan
Getting approved for an interest-only loan can be more difficult than it is for a principal and interest loan. That’s because interest-only loans are generally considered to be riskier by lenders.
To make your application as strong as possible you can:
- Save more: If it's a first-home buyer loan and you have a large deposit, your bank will view you as less of a risk. Aim for a deposit of at least 20% of the property’s value (80% loan-to-value ratio), but the minimum LVR lenders will consider is 95%.
- Justify your choice: If you have a clear justification for applying for an interest-only loan (e.g. it is just a temporary bridging loan) your lender may look at your application more favourably.
- Apply through a broker: If you’re unsure whether or not your bank will approve your interest-only home loan application, engaging a mortgage broker with experience helping borrowers in your situation may improve your chances.
