Find and compare interest only home loans

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3.04%

Variable

2.68%

Athena Home Loans

$760

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

3.44

/ 5
View Now
More details

3.03%

Variable

2.70%

UBank

$758

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

3.68

/ 5
View Now
More details

3.04%

Variable

2.93%

Athena Home Loans

$760

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

3.44

/ 5
View Now
More details

2.79%

Fixed - 1 year

3.23%

Adelaide Bank

$698

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

3.85

/ 5
More details

3.29%

Variable

3.71%

NAB

$823

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

3.36

/ 5
More details
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What are interest-only loans?

Most mortgages are principal-and-interest loans, which require borrowers to simultaneously pay interest and pay down their principal.

However, with interest-only loans, borrowers only pay interest, which means their principal doesn’t get reduced.

For example, imagine you wanted to buy a $440,000 property. You might borrow $350,000 at an interest rate of 5 per cent, with the mortgage spread over 30 years and repayments scheduled for each month.

If you had a principal-and-interest loan, you would have to pay $1,889 per month – $1,468 of that would be interest, while the other $421 would go towards reducing the principal. (So, after one month, your mortgage would be reduced from $350,000 to $349,579. After two months, it would be reduced to $349,158.)

If you had an interest-only loan, you would have to pay just $1,468 per month. This would be nothing but interest, so your outstanding mortgage would remain at $350,000.

Generally, interest-only loans last for a maximum of five years, at which point the loan automatically reverts to a principal-and-interest loan (although some lenders will allow you to extend the interest-only period).

In the example above, you would now be left with 25 years to repay your $350,000 mortgage, which would require monthly repayments of $2,056.

If you did five years of interest-only followed by 25 years of principal-and-interest, your total cost would be $704,920. If you did 30 years of principal-and-interest, your total cost would be $679,995 – a difference of $24,924.

How do interest-only loans work?

Let’s take the example quoted above – a 30-year mortgage worth $350,000 with monthly repayments and an interest rate of 5 per cent.

The table below shows what would happen if the mortgage functioned as a principal-and-interest loan for the entire 30 years.

It also shows what would happen if you went interest-only for five, 10 or 15 of the 30 years, before switching to principal-and-interest for the remainder of the loan term.

Scenario P&I loan IO for 5 years IO for 10 years IO for 15 years
Monthly repayments during interest-only period $1,889 $1,468 $1,468 $1,468
Monthly repayments after interest-only period $1,889 $2,056 $2,320 $2,778
Total repayments made $679,995 $704,920 $732,963 $764,300
Additional interest paid due to the interest-only period $0 $24,924 $52,968 $84,305

What are the pros of interest-only loans?

Clearly, people take out interest-only loans so they can reduce their repayments during the interest-only period.

But the real point of interest-only loans is not so much to save money but to use this money to do something else.

In the example above, you’d be left with an extra $421 in your pocket each month. 

The boxes below show three ways you could use that extra money to your advantage.

Pro #1. Enter the market ahead of schedule

If you were a young first home buyer, you might not be able to afford to buy your hypothetical $440,000 property if you had to pay $1,889 per month. However, you might be able to afford it if you only had to repay $1,468 per month for the first five years.

Sure, you’d have to pay an extra $24,924 over the life of the mortgage. But if you held off entering the market until you had enough money to afford a principal-and-interest loan, your property might end up costing you an extra $30,000 or $40,000.

Also, by the time your mortgage reverts to principal and interest, your salary is likely to be higher, which would hopefully mean that you could now afford the increased repayments.

WARNING: This strategy could backfire if your property doesn’t increase in value during the five-year period or if you can’t afford the higher repayments once it ends.

Pro #2. Buy an investment property ahead of schedule

Imagine that you used an interest-only loan to enter the market ahead of schedule – but this time with an investment property. And imagine the value of this investment increased by 10 per cent during the interest-only period.

In that case, your property’s value would climb from $440,000 to $484,000 – so you’d pay an extra $24,924 in repayments to gain an extra $44,000 in equity.

Also, if your investment property was negatively geared, you’d be able to use some of the interest payments to reduce your taxable income.

WARNING: This strategy could backfire if your property doesn’t increase in value during the five-year period or if you can’t afford the higher repayments once it ends.

Pro #3. Repay higher-interest debt

Starting your mortgage with an interest-only term could be smart if you also had to repay other debts that were priced higher than the 5 per cent being charged for your mortgage.

For example, you could use the extra $421 per month to pay off a car loan (at, say, 8 per cent), a personal loan (12 per cent) or a credit card debt (15 per cent).

WARNING: This strategy could backfire if you didn’t use the extra money to repay the other debts or if you couldn’t afford the higher repayments once your interest-only period ended.

What are the cons of interest-only loans?

There are two big disadvantages with interest-only loans.

First, your mortgage doesn’t decrease during the interest-only period.

Second, you end up paying more over the life of the mortgage.

The other disadvantage is that the repayments you will be charged once you move from interest-only to principal-and-interest will be higher than if you’d been on principal-and-interest all along.

That could cause problems if your financial position hadn’t improved during the interest-only period.

How do you compare interest-only loans?

You should compare interest-only loans by looking at these five main factors:

  1. Advertised rate
  2. Revert rate
  3. Fees
  4. Comparison rate
  5. Features

All five factors are explained in more detail in the boxes below.

Factor #1. Advertised rate

The advertised interest rate is an obvious place to start when comparing interest-only mortgages.

All things being equal, a home loan with a lower interest rate is better than a home loan with a higher interest. However, as the other comparison points below illustrate, all things are often not equal.

Factor #2. Revert rate

Once your interest-only period ends, your interest-only home loan will revert to a principal-and-interest (P&I) home loan. Lenders generally charge a different interest rate for P&I mortgages than interest-only mortgages, so you’ll also want to compare these ‘revert rates’ when doing your research.

Factor #3. Fees

Interest-only home loans can come with a range of fees that can add significantly to the cost of the mortgage.

You may be asked to pay upfront fees when you apply, monthly/annual fees during the life of the loan and discharge fees whenever you close the loan.

Factor #4. Comparison rate

When you research interest-only mortgages, you’ll be shown two interest rates - the advertised rate and the comparison rate. The advertised rate is just what it looks like - the interest rate you’ll be charged. The comparison rate, by contrast, combines the advertised rate with the main fees you’ll have to pay.

As a result, the comparison rate tends to give a better view of the total cost of the loan than the advertised rate.

Factor #5. Features

Interest-only mortgages may include a range of features that make the loan more flexible and easier to repay. Features might include:

  • Offset account - an offset account is a linked transaction account that not only gives you ready access to cash but also reduces how much interest you’re charged. For example, if you have an outstanding mortgage of $500,000 and an offset account balance of $20,000, you’ll be charged interest on $480,000 rather than $500,000.
  • Redraw facility - a redraw facility allows you to ‘borrow back’ (or redraw) any extra repayments you’ve made. A redraw facility also reduces how much interest you’re charged, just like an offset account.
  • Loan split - a loan split allows you to divide your mortgage into two loans if you can’t decide whether to choose a variable rate or a fixed rate. One loan would have a variable rate and the other would have a fixed rate.
  • Repayment holiday - some lenders will allow you to pause your interest-only mortgage repayments to help you through a life event, such as a pregnancy. However, please note that when your repayment holiday ends, your monthly repayments will probably be increased so your home loan is still paid off according to the original schedule.

Who has the best interest-only loans?

Unfortunately, it’s impossible to say who has the ‘best’ interest-only loans.

One reason is that mortgages are highly subjective - one person might prefer a loan that has a lower interest rate but no offset account, while another might prefer a loan that does have an offset account but comes with a higher rate.

Another point worth mentioning is that lenders often change their interest rates, fees and policies, so whichever interest-only loan you consider the best today might not be the best tomorrow.

Why would I want an interest-only home loan?

Interest-only loans aren’t for everyone, because they come with both risks and disadvantages.

For some people, though, interest-only home loans can make sense, because the mortgage payments are smaller (at least before it reverts to a principal-and-interest loan).

These ‘savings’ can then be used for other purposes, such as buying another property.

How do you take out an interest-only loan?

There are three ways you can take out an interest-only loan:

  1. Use a comparison site (like RateCity)
  2. Go through a mortgage broker
  3. Go direct-to-lender

Are interest-only loans dangerous?

Interest-only loans can be useful products when they’re managed properly - but they can be dangerous when they’re not.

The danger lies in not being able to afford the mortgage repayments once the loan reverts from an interest-only mortgage to a principal-and-interest (P&I) mortgage.

During the interest-only stage, your repayments will be lower than if you had taken out a P&I loan. But once the loan reverts to P&I, your repayments will be higher.

Imagine you take out a $400,000 mortgage with a 30-year loan term and an interest rate of 4.5 per cent. The table below shows how your repayments would differ if you chose a standard P&I loan or a loan with a five-year interest-only term.

Scenario P&I loan IO for 5yrs
Monthly repayments in years 1 to 5 $2,027 $1,500
Monthly repayments in years 6 to 30 $2,027 $2,223
Total repayments made $729,627 $756,999
Additional interest paid due to the interest-only period $0 $27,372

Should I take out an interest-only loan?

People sign up for interest-only loans because they allow you to lower your repayments during the interest-only period.

However, these initial savings come at a cost – literally.

First, you’ll have to accept higher repayments once the interest-only period ends.

Secondly, you’ll have to pay more over the life of the mortgage.

That’s why you should think carefully before taking out this sort of loan.

It sounds obvious, but you should only choose an interest-only loan over a principal-and-interest loan if you’re convinced the short-term gains will exceed the long-term costs.

The key, though, is to actually do your sums.

FAQs

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

What is 'principal and interest'?

‘Principal and interest’ loans are the most common type of home loans on the market. The principal part of the loan is the initial sum lent to the customer and the interest is the money paid on top of this, at the agreed interest rate, until the end of the loan.

By reducing the principal amount, the total of interest charged will also become smaller until eventually the debt is paid off in full.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

Mortgage Calculator, Repayment Type

Will you pay off the amount you borrowed + interest or just the interest for a period?

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

What is a guarantor?

A guarantor is someone who provides a legally binding promise that they will pay off a mortgage if the principal borrower fails to do so.

Often, guarantors are parents in a solid financial position, while the principal borrower is a child in a weaker financial position who is struggling to enter the property market.

Lenders usually regard borrowers as less risky when they have a guarantor – and therefore may charge lower interest rates or even approve mortgages they would have otherwise rejected.

However, if the borrower falls behind on their repayments, the lender might chase the guarantor for payment. In some circumstances, the lender might even seize and sell the guarantor’s property to recoup their money.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Why was Real Time Ratings developed?

Real Time RatingsTM was developed to save people time and money. A home loan is one of the biggest financial decisions you will ever make – and one of the most complicated. Real Time RatingsTM is designed to help you find the right loan. Until now, there has been no place borrowers can benchmark the latest rates and offers when they hit the market. Rates change all the time now and new offers hit the market almost daily, we saw the need for a way to compare these new deals against the rest of the market and make a more informed decision.

What is a debt service ratio?

A method of gauging a borrower’s home loan serviceability (ability to afford home loan repayments), the debt service ratio (DSR) is the fraction of an applicant’s income that will need to go towards paying back a loan. The DSR is typically expressed as a percentage, and lenders may decline loans to borrowers with too high a DSR (often over 30 per cent).

Why is it important to get the most up-to-date information?

The mortgage market changes constantly. Every week, new products get launched and existing products get tweaked. Yet many ratings and awards systems rank products annually or biannually.

We update our product data as soon as possible when lenders make changes, so if a bank hikes its interest rates or changes its product, the system will quickly re-evaluate it.

Nobody wants to read a weather forecast that is six months old, and the same is true for home loan comparisons.

What is a construction loan?

A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.