Interest-only home loans

How an interest-only loan works

Moneysmart (page updated 29 October 2026) says repayments on an interest-only loan "only cover interest on the amount borrowed", and the amount you owe does not fall during the interest-only period. When it ends, the loan switches to principal and interest, so repayments rise. Moneysmart's own example is a five-year interest-only period on a loan repaid over 25 years, where repayments go from $2,010 a month to $3,250.

Moneysmart also lists who may find the structure useful: people who want lower repayments for a time, short-term borrowing such as bridging finance or a construction loan, and investors, who may be able to claim higher tax deductions on an investment property. Check tax with the ATO or a registered tax agent.

A worked example on $600,000

RateSonar's arithmetic, rate held constant, as at 2 Nov 2026:

Two things stand out:

• The saving is real but temporary. The interest-only payment is lower than a 30 year principal and interest payment at the same rate.
• The step-up is the cost. After five years you still owe $600,000, and you repay it over 25 years instead of 30, so the repayment is higher than if you had paid principal and interest from day one.

Real loans change rate over time, so these figures are a guide to the shape, not a forecast.

What it costs overall

You pay more total interest, because the balance is not falling during the interest-only period. Moneysmart also warns that the interest rate "could be higher than on a principal and interest loan". RateSonar's data shows the same direction across 71 advertised interest-only loans. The middle interest-only rate is 0.35 points above the principal and interest middle, as at 2 Nov 2026. The lowest advertised interest-only rate is 6.19% (Bank of us).

Moneysmart lists the risks:

• repayments may become unaffordable when the interest-only period ends;
• with no principal repaid, you build no equity unless the property rises in value, which matters if you need to sell in a downturn;
• as interest rates rise, repayments go up even more.

A bit of history: APRA's benchmark

In March 2017, APRA put in place a temporary benchmark limiting new interest-only lending to a 30 per cent share, according to APRA's announcement dated 19 December 2018. The announcement, which removed the benchmark, said it had led to a marked reduction in the share of new interest-only lending. Lenders no longer bound by the investor loan growth benchmark were released from 1 January 2019, and others when their investor benchmark was removed. RateSonar did not verify what limits apply to a lender today. Ask your lender about its own policy.

Mistakes and what to ask

• Planning around the low payment. Test the higher repayment before you commit. Moneysmart suggests making sure you can afford the higher repayments at the end of the period.
• Not checking what happens at the end. Ask whether the loan reverts automatically to principal and interest and whether you can extend the interest-only period (lender policy differs).
• Not asking about the rate at the switch. Ask whether the rate changes at the end of the period.
• Not comparing like with like. Compare interest-only loans with interest-only loans on the interest-only home loan board, then see owner-occupier loans at owner-occupier interest-only and investor loans at investor interest-only.

Moneysmart also suggests gradually increasing repayments before the switch and speaking to your lender or a financial counsellor if you are worried about affordability. For stress, see what to do if you are struggling with repayments. For the investor side, see investor vs owner-occupier rates. All loans are on home loan rates.