Interest Only is an arrangement with the lender where you only make interest payments. Once the agreed interest only period ends, you will begin to repay Principal & Interest.

Interest only loans have been making headlines in Australia.  They are usually the repayment of choice for investors as only interest is tax deductible, not the principal.  Investors are generally looking to capitalise on rising house prices rather than repaying home loans in order to grow equity.  Owner occupiers may select it to use cash flow for other purposes.

Since 2014/15 lenders have introduced higher interest rates for investment loans compared to owner occupied.  In 2016/17 lenders also introduced higher interest rates for interest only loans compared to principal & interest.  The result is that a principal & interest owner occupied loan can have an interest rate up to 0.7% lower than an interest only investment loan.  These changes have been applied by lenders in response to requests from the banking regulators to address the higher risk for interest only and investment loans, and also to try curbing the growth of interest only loans.

The Australian Government’s Money Smart website has some interesting graphics on the topic, which also highlights the risk Australian lenders.

Owner Occupied
1-in-4 home loans are Interest Only

Investor
2-in-3 loans are interest only

 

The total amount of borrowings with interest only repayments has more than doubled between 2012 and 2016, to well over $150 billion.

BenefitsDownsides
  • Lower repayments during the interest only period
  • Maximises the tax benefits for investment loans
  • Money saved can be put to other uses, such as paying off more expensive debt or a purchase
  • There will be higher repayments when the interest only period ends
  • It leads to higher repayments over the life of the loan
  • The loan principal will not reduce whilst on interest only.
  • You will most likely pay a higher interest rate.
  • May be restricted to lower LVRs.

Interest only loans remain incredibly popular.  Used or the right purpose they definitely still have a part to play.  However, interest only loans for owner-occupiers are becoming more difficult to obtain and require a good reason for wanting one.

Please go to our interest only calculator to find out what the costs will be for you.