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Best interest-only home loan rates comparison

  • See the top interest-only home loan offers, with rates starting from 5.75% (comparison rate^ 5.88%)
  • Find your best deal

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Interest only home loans

Best interest-only home loans in Australia

Compare the best interest-only home loan rates in Australia, starting from 5.75% p.a. (comparison rate^ 5.88% p.a.). Check your eligibility with 26 lenders online, instantly. We display all interest-only loans available on our database and we’re not paid by lenders if you click through to their website. The table is sorted by lowest regular repayment. Use the filters to search for your best interest-only loan. Read the comparison rate warning and other important information.

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Rates updated 10 October 2024

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Lowest interest-only loan rates in October 2024

We’ve rounded up the lowest interest-only home loan rates available in October 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: 5.89% p.a., (fixed for 3 years) comparison rate 6.47% p.a. (max 80% LVR). Queensland Country Bank.
  • Lowest fixed interest-only rate (investor): 6.04% p.a., (fixed for 2 years) comparison rate 6.09% p.a. (max 95% 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 home loan expert

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

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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.

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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 loanInterest-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

This is a hypothetical example only and does not factor in loan fees and other costs. Actual costs and differences will be different depending on the details of the loans.

Expert tip: Think about your interest-only 'exit strategy'

Mansour Soltani

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
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  • It generally doesn't cost to switch to interest-only repayments and back to P&I repayments
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  • You can still make extra repayments to reduce your loan balance during the interest-only period
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  • Making interest-only repayments frees up cash flow to use elsewhere or invest
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  • You can choose the duration of your interest-only period based on your financial situation
Cons
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  • Interest-only mortgages generally have higher interest rates than P&I home loans
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  • Your home loan repayments will be higher after the interest-only term
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  • You don’t build equity in your property with interest-only repayments (because you’re not paying down what you owe)
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  • 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.

Home loans guides & resources

What's the next step on your property journey? Our home loan guides will help you navigate the road ahead, whether you're buying, building or looking to save on an existing loan.

Interest-only home loans FAQs

An interest-only home loan is a loan that only requires you to make interest payments for a fixed period of time. When that period ends, your repayments will revert to principal and interest.

In some cases, interest-only repayments may be suitable for a property investment home loan. The idea is to minimise property costs (i.e. interest on the investment loan) and to use that money for other investments. There are risks to this strategy, however, and it generally relies on the property increasing in value during the interest-only period (and that is never guaranteed). Some investors may be willing to accept increased property expenses to declare a rental loss (known as negative gearing) to offset against other taxable income.

Investors should always talk to an expert for advice before opting for an interest-only home loan, as they can be risky and very expensive if things don’t work out.

All of the big four banks (ANZ, NAB, Commbank & Westpac) and most other lenders offer interest-only home loans. That includes non-bank lenders, credit unions, plus non-bank lenders offering low doc home loans and bad credit home loans. You can get an interest-only home loan directly from a lender or through a mortgage broker.

Interest-only home loans tend to come with higher interest rates compared to principal and interest home loans. And while your loan will cost you less in repayments during the interest-only period, you typically pay more interest overall with an interest-only home loan.

To apply for an interest-only home mortgage you will usually need a deposit of at least 5% of the property’s value. Put another way, the minimum loan-to-value ratio is typically 95%.

However, unless you have a deposit of at least 20%, you may need to pay for lender’s mortgage insurance LMI).

Sean Callery is the Editor of Money.com.au. He has over 15 years of international experience. He is qualified with a Certificate IV in Finance and Mortgage Broking (FNS40821) and is compliant to provide general advice in Tier 1 General Insurance (RG 146) products.

Mansour Soltani is Money.com.au’s home loans expert. He’s a mortgage broker with more than 20 years of experience in the finance and real estate industry. Mansour is the Director of Soren Financial and has been featured in publications such as the ABC, Domain.com.au and Australian Broker.

Important information

Home loan comparison rates are calculated based on a loan amount of $150,000 repaid over a 25-year term with monthly repayments. The comparison rates only apply to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees and cost savings such as fee waivers are not included in the comparison rate but may influence the cost of the loan. Check with the provider for full loan details, including rates, fees, eligibility and terms and conditions to make sure the product is right for you.

General information only

The information on this page is general in nature and has been prepared without considering your objectives, financial situation or needs. You should consider whether the information provided and the nature of any home loan product is suitable for you and seek independent financial advice if necessary.

We are not providing you with a recommendation or suggestion about a particular home loan. You should read the relevant disclosure statements or other offer documents before deciding whether to apply for or continue to use a particular product.

What products, features and information are shown

While we make every effort to ensure all home loans available in Australia are shown in our comparison tables, we do not guarantee that all products are included.

Our product comparisons may not compare all home loan features and attributes relevant to you.

Product information, such as interest rates, fees and charges, is subject to change without notice. Before acting on any information, you should confirm the relevant product information with the lender.

How home loans are sorted and filtered by default

Users can easily change the sort order and apply product filters to our product comparison tables. However, when you arrive on a page initially, by default home loans are sorted by:

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  • Lowest regular repayment amount, then;
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  • Loans interest rate, then;
  • circle-green-tick
  • Lowest comparison rate, then;
  • circle-green-tick
  • Provider name (A-Z)

Some home loan products listed in our tables are available through a mortgage broker. These are the products with an option to ‘Check Eligibility on Money.com.au’. Mortgage brokers may not be able to offer loans from every provider and there may be more suitable loans for your personal circumstances.

Mortgage brokers are not authorised by Money's Australian Credit Licence and operate under their own Australian Credit Licence, or as a credit representative of another Australian Credit Licensee. Mortgage brokers can make recommendations about home loan products that may suit your objectives, financial situation and needs.

Our tables feature all home loans available from lenders on our database that match the search criteria selected. Lenders do not pay to feature in our tables, nor do we earn commission if you click to visit a lender’s website. The order of the products in the table is not influenced by any commercial arrangements.

If you get help from a mortgage broker as a result of visiting this page, we may earn a commission.

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