Compare Interest Only Home Loans - Australia

Interest only home loans may seem attractive because they can allow you to get a home loan with lower monthly repayments compared to a principal and interest home loan. But choosing a home loan can be a pretty confusing experience sometimes, and depending on your circumstances, interest only may not always be the best option.

If you’re looking to buy a home or investment property, deciding on a suitable home loan is a critical step, and getting it wrong could cost you in the long run. That’s why we put together this guide. It’ll give you facts to help you compare a range of interest only home loan rates, and other types of loans, to help you decide if it is a suitable home loan option.

When you apply for a home loan, you can generally choose one of two repayment types. You can either just pay the interest (usually for a short period) or you can pay the principal and interest to help pay down the principal with each home loan repayment. The former is an interest only loan and the latter is a principal and interest home loan.

Here’s a breakdown to explain what is meant by principal and interest:

• Principal is the amount of money you borrow from your lender (the loan amount)
• Loan balance is the amount of principal you still have to repay (so it’s also sometimes called the principal balance)
• Interest is the cost your lender is charging you for the privilege of borrowing money from them, and it’s a percentage of the loan balance

An interest only home loan is set up so your monthly repayments only contribute to paying the interest charges and fees, for a set period of time. While an interest only home loan can reduce your monthly repayments in the short term, they can end up costing you more in the long run, because you’re not incrementally reducing the loan principal.

The mechanics of an interest only home loan are the same as for other home loans. You submit an application. The lender reviews your application. If you're approved the lender issues a loan offer, which includes the loan amount, loan term (generally between 25 years and 30 years), all the loan fees and charges, and the full set of terms and conditions. And then you sign the contract and the lender will transfer the full loan balance on settlement.

The difference arises when you begin repaying the loan.

While most loans generally require you to make principal and interest repayments, instead interest only home loans don’t require you to repay the principal, at least initially. You still have to pay any monthly or annual fees, it’s just that your monthly repayments only include the interest on the principal.

The term ‘interest only loan’ is a bit of a misnomer, though. You see, in most circumstances you can’t get a loan and pay only interest indefinitely because you’d never actually repay the principal. Instead, interest only loans allow you to pay just the interest and other fees for a specified period of time (usually a few years) and then you have to begin repaying the principal as well, just like any other loan.

For the entire interest only period, the interest is calculated on the same loan principal. Principal and interest loans are often cheaper over the life of the loan because your loan balance decreases from the very first loan repayment, and therefore the amount of interest you have to pay begins to reduce almost immediately as well. In short, you generally pay less interest overall when you have a principal and interest loan.

But that doesn’t mean principal and interest loans are the only option. As we indicated above, interest only loans may be an option in some circumstances.

For example, someone who has recently suffered a temporary financial hardship, such as a sudden loss of employment, may appreciate being offered the short term relief of interest only repayments while they find employment. Some investors may decide to choose an interest only loan to free up cash flow for other activities, such as freeing up funds to invest in renovating a property to sell.

It’s important to note that interest only home loans are not suitable for everyone and, depending on the circumstances, can cost significantly more over the life of the loan. It can help to speak to a financial advisor before you make any decisions about switching to an interest only loan.
Some of the reasons why an Australian borrower might decide to consider an interest only home loan can include:

• Lower monthly payments. By only paying for the interest on the loan each month, the monthly payments are lower compared to a principal and interest loan. This can help to make your loan repayments more affordable in the short term, however is likely to make the loan more expensive in the long term.
• Flexibility. Interest only home loans can offer budgeting flexibility for some borrowers, with lower monthly repayments.
• Short term relief For some borrowers experiencing some short term challenges with balancing the home budget, switching to interest only payments could provide some short term relief.
• Investment purposes. Interest only home loans are often used by property investors who want to maximise their cash flow by only paying off the interest each month. For some investors, being able to claim a deduction through the interest payments on their investment property (where the property is generating an income) can also be attractive.

If you’re looking for information about how negative gearing works, and how interest payments may be tax deductible for eligible properties generating an income, it's a good idea to speak with a tax professional, such as an accountant.

An interest only home loan may seem like a great option due to the lower monthly loan repayments. When you choose an interest only home loan, you’ll only be required to pay the interest charged on the loan each month, which is why your monthly mortgage payments will be lower than if you were paying down the principal as well. However, because you’re not paying down any of the principal, the loan will not reduce in size over time. This means that at the end of the interest only period, you’ll still owe the full amount of the loan.

It’s also worth noting that while your home loan repayments may be lower in the short term, it will likely mean that you’ll be paying more interest over the life of the loan. This is because you’re not reducing the size of the loan, so the interest will continue to be calculated and charged on the same loan balance.

Another risk to consider is negative equity. This is where the value of a property is less than the value of the loan, meaning you owe more than the home is worth. Because interest only repayments do not pay down the loan principal there can be a heightened risk of negative equity if your property value were to decrease, compared to if you made principal and interest repayments.

The amount you are able to borrow with an interest only home loan will depend on several factors, including your credit score, income, deposit, and the value of the property you’re buying. Typically, lenders will look for a minimum deposit of 20 per cent or more of the purchase price in order to approve an interest only home loan. There may be options available with a lower deposit, however this may mean you need guarantor or lenders mortgage insurance to secure the loan.

The interest rate on an interest only home loan will vary based on the lender and the market conditions, but it can be higher than the interest rate for a principal and interest home loan. This can also influence the amount you can borrow.

Like other home loans, the minimum deposit for an interest only home loan will generally range from 5 to 20 per cent of the property value, but the exact amount will depend on your lender’s requirements and your own financial situation. Some lenders may ask for a higher deposit if you have a lower credit score or income, while borrowers with a strong financial profile may be able to secure an interest only home loan with a lower deposit.

Lenders mortgage insurance (LMI) is another important factor to consider when you’re saving for a home loan deposit. LMI is a type of insurance that protects your lender if you default on your loan. In Australia, LMI is generally required if your deposit is less than 20 per cent of your property value. The cost of LMI can add thousands of dollars to the cost of your loan, so it's important to factor this into your savings plan.

There are some scenarios where LMI may not be required, even where the deposit is less than 20 per cent. These can include an LMI waiver from your lender for certain eligible professions, government home buying schemes or a family member acting as a guarantor on the loan.

Not all lenders will charge the same fees, or the same amount for their fees, with some lenders charging no fees (other than the interest charges). Looking at the comparison rate, which is a percentage that represents the interest rate plus some of the common fees, can be a helpful tool when comparing home loans.

There are other costs that can be associated with establishing a home loan, some of these might include:

• Conveyancing costs. When you take out a home loan, you may need to pay for legal services to help you with the process. These costs can include conveyancing, title searches, and or other legal services.
• Lenders mortgage insurance (LMI). This is an insurance policy that protects the lender in case you default on your loan. LMI is usually required if you have a deposit of less than 20 per cent, meaning you have a high amount of debt relative to the value of your property.

Calculating the interest charges on an interest only home loan is reasonably simple, and with the help of an interest only home loan calculator, you can get a clear understanding of the costs involved in this type of loan. An interest only home loan calculator is an online tool that allows you to input various factors such as the loan amount, interest rate, and loan term, to estimate the interest charges on an interest only home loan. You can then estimate the amount of interest you’ll have to pay over the life of the loan.

The interest only period on a home loan is typically between one and five years. This can have a significant impact on the amount of interest you pay over the life of the loan, so it's important to check the costs involved.

There’s no single best interest only home loan because everyone’s needs are different, and what’s suitable for one person might not be for another.

However, once you’ve decided you want to apply for an interest only home loan, you may want to compare a range of home loan options. Comparing a range of specific interest only loans could help give you confidence you have the information you need to choose a home loan that’s suitable for you.

Our main home loan comparison page includes a guide to comparing home loans. You can update it specifically for interest only home loans, by adding these questions into the mix:

• Are you planning on renovating the property you buy sometime down the track? If so, you might appreciate having an offset account, which would enable you to reduce how much interest you have to pay while you save for your renovation. Or you might enjoy a redraw facility, which would enable you to withdraw extra repayments if you need extra funds to pay for the renovations. (Unlike with a credit card, once you make a repayment, you can’t access additional funds unless your home loan includes a line of credit or offers a redraw facility which you’ve made additional payments into.)
• Have you got a deposit equal to 20 per cent of the value of the property you want to buy?
• Is this loan for your first home? If so, you might look to apply for one or more of several government and state and territory schemes designed to make buying your first home easier.
• How long do you anticipate needing an interest only period? Most owner-occupier interest only loans have interest only periods of three to five years. - The length of the interest only could be a key deciding factor when you’re shopping for an interest only loan.

And don’t forget to review the comparison rates of the loans you’re considering, as this will give you a good idea of how the loan fees impact how much you’ll pay the lender over the life of the loan.

One last thing to be aware of — interest-only loans can be fixed-interest, they can have a variable rate, or they can include a mix of fixed and variable interest rates. So don’t forget to factor that into your comparisons.

The time it takes to get an interest only home loan can vary, depending on a number of factors, including your lender’s processes, the loan size, your credit score, and the type of property you want to buy.

On average, it can take anywhere from a few days to several weeks to get an interest only home loan approved in Australia. The process may be faster if you have a good credit score and a stable income, and if the property you want to buy is straightforward. But if you have a lower credit score or a more complex application, it may take longer to get approved.

First, it’s important to gather all the necessary documents and information, such as proof of income, identification, and property details. It’s also a good idea to compare the interest rates, fees, and terms and conditions offered by different lenders, before you choose a loan to apply for. This can take some time, but it’s important to make an informed decision and choose a loan that meets your needs.

Once you’ve gathered all the necessary information and chosen a lender, you can submit your application and wait for a decision.
If your application is approved, you will then need to sign the loan agreement and provide any additional information or documentation requested by the lender.

Finally, once everything is in order and settlement is ready, the lender will disburse the funds.

Refinancing your home loan can be a great way to save money, reduce your monthly repayments or access equity in your property.

If you have an interest only home loan, you may be able to refinance to another interest only loan, or to a principal and interest loan. Refinancing to a principal and interest loan means that you'll start paying down the principal of the loan, which can make your repayments higher in the short-term, but lower the interest charged in the long-term. Refinancing to another interest only loan can also give you access to lower interest rates or more flexible loan terms.

When considering refinancing your interest only home loan, it's a good idea to compare different loan products and compare the interest rates, fees and other loan terms. You can do that in the comparison table on this page. You should also consider the cost of refinancing, including any break or discharge fees from your current lender, legal fees and other charges.

There are a number of reasons why you might choose to refinance your interest only home loan, including:

• To access a lower interest rate. If there are cheaper interest rates available with a different lender or loan product, refinancing can allow you to take advantage of lower interest rates and which could lower your monthly repayments.
• To change loan terms. Refinancing can allow you to change the length of your loan term, the type of loan, or the repayment frequency, to better suit your circumstances.
• To access equity in your property. If you've built up equity in your property, refinancing can allow you to access this equity and use it for things like home renovations, investment or debt consolidation.
• To reduce your monthly repayments. By refinancing to a lower interest rate or changing the loan term, you may be able to reduce your monthly repayments or save money in the long-term.

An interest only home loan is a type of mortgage that allows you to reduce your monthly repayments by paying only the interest on your loan, rather than paying down the principal and interest. But, can having an interest only loan have a negative impact on your credit score?

Your credit score is a reflection of your creditworthiness, and is based on a number of factors in your credit history, including your payment history, the amount of credit you have outstanding, the number of applications for credit you’ve made, and the length of time you’ve held credit. When it comes to home loans, lenders will consider your credit score as part of their decision to approve you for a loan. It may also influence what interest rate you’ll be offered.

While it’s unlikely that simply holding an interest only home loan will have a negative impact on your credit score, there are some factors to consider that might put your credit score at risk. For example, because you’re only paying the interest on your loan, you’re not reducing your overall debt, which may make it more difficult for you to pay off your loan in the future. This can be particularly problematic if interest rates rise, or if your financial situation changes and you are no longer able to afford your repayments. If you miss payments on your interest only home loan, this will usually be reflected on your credit report, which can damage your credit score.

It's also worth noting that interest only home loans are generally considered higher risk by lenders, because the borrower is not paying down the principal of the loan. As a result, if you’re applying for an interest only home loan, you may find it more difficult to gain approval, or you may be offered a higher interest rate.

Here's a step-by-step guide for applying for an interest only home loan in Australia:

• Determine eligibility. Before applying for an interest only home loan, it's important to assess your eligibility. Generally, lenders will consider factors such as your income, credit history, and the value of the property you're using as collateral.
• Choose a lender. There are many lenders in Australia offering interest only home loans, so it's important to choose one that's right for you. It may help to compare them using a comparison table like the one on this page. Consider factors such as interest rates, loan terms, comparison rates, and any fees or charges that will come with the loan.
• Gather required documents. To apply for an interest only home loan, you'll need to provide documents, such as proof of income, proof of identity, and a property valuation report.
• Submit an application. Once you've gathered all the required documents, you can submit your application to the lender.
• Wait for approval. After submitting your application, the lender will review it and decide whether to approve or reject the loan. This process can take a few days or weeks, depending on the lender and the strength of your application.
• Review loan details. If your loan is approved, you'll receive a loan offer from the lender, detailing the loan terms and conditions. It's important to carefully review these details to ensure you understand all the terms and conditions of the loan.
• Sign the loan agreement. If you're satisfied with the loan offer, you'll need to sign the loan agreement and return it to the lender. This will formally establish the loan and the terms and conditions agreed upon.

Instead of recommending a particular loan, we’ve given you facts to help you understand how this kind of loan actually works, and then we’ve laid out simple, easy-to-follow questions for comparing a range of home loan options, for interest only and other kinds of loans. This means you’ll always have tools to help you pick an interest-only home loan, or any other kind of credit, that’s suitable for your needs.