An interest only home loan allows you to pay only the interest portion of your mortgage for a set period, instead of paying both interest and principal from the beginning.
While this can lower your repayments in the short term, it also means you are not reducing the amount you borrowed during the interest-only period.
For some borrowers, this structure can offer flexibility. For others, it can create higher long-term costs if not used carefully.
If you’re comparing mortgage options, it’s important to understand how an interest only home loan in Australia works before applying.
What Is an Interest Only Home Loan?
With a standard home loan, your repayments usually go toward both:
- the interest charged by the lender
- the principal (the amount you borrowed)
With an interest only home loan, your repayments only cover the interest for a set period, often between one and five years.
Once that period ends, the loan usually switches to principal and interest repayments.
That means repayments often increase after the interest-only term finishes.
How Does an Interest Only Home Loan Work?
During the interest-only period:
- your repayments are lower
- your loan balance usually stays the same
- you are not paying down the actual debt
After the interest-only term ends:
- you begin repaying the principal as well
- repayments often become noticeably higher
- the remaining loan term is shorter for repaying the balance
This is why it’s important to plan ahead before choosing this loan structure.
Who Might Consider an Interest Only Home Loan?
Interest only loans are more commonly associated with:
- property investors
- borrowers with short-term cash flow needs
- people expecting temporary income changes
- borrowers with a clear financial strategy
Some owner-occupiers may also consider them, but they are not always the best fit for long-term household affordability.
If you’re still deciding between loan structures, it may also help to compare a fixed vs variable home loan Australia setup.
Pros of an Interest Only Home Loan
For the right borrower, an interest-only loan can offer some short-term benefits.
Potential advantages include:
- lower initial repayments
- improved short-term cash flow
- flexibility for some investment strategies
- temporary repayment relief during certain life stages
For example, some investors may use interest-only loans to preserve cash flow while holding a property.
Risks of an Interest Only Home Loan
While lower repayments can sound attractive, there are trade-offs.
Potential disadvantages include:
- you are not reducing your loan balance during the interest-only term
- total interest paid may be higher over time
- repayments can jump significantly later
- it may delay progress toward full ownership
For many borrowers, the biggest shock comes when the loan switches to principal and interest repayments.
Interest Only vs Principal and Interest
The biggest difference is what your repayments are actually doing.
Interest only loan:
- lower repayments initially
- debt usually stays the same during the interest-only period
Principal and interest loan:
- repayments reduce your loan balance over time
- often better for long-term ownership goals
For borrowers focused on gradually paying off their home, principal and interest loans are often the more common structure.
Is an Interest Only Loan Good for First Home Buyers?
In many cases, first home buyers are better off understanding all loan structures before choosing interest only.
While it may reduce repayments initially, it can also increase future pressure if not planned carefully.
If you’re buying your first property, reviewing first home buyer home loan Australia options may be a better starting point.
What to Compare Before Choosing an Interest Only Loan
Before applying, compare:
- interest rate
- comparison rate
- fees
- length of the interest-only term
- what repayments become afterward
- flexibility to refinance or switch
It’s important to understand not just the short-term cost, but also what the loan looks like once the structure changes.
Compare Home Loans Carefully
An interest-only structure can work in some situations, but it should be compared carefully against more traditional loan types.
If you’re exploring different mortgage options, start by reviewing our compare home loans Australia guide.
FAQs About Interest Only Home Loans
Is an interest only home loan cheaper?
It can lower repayments initially, but it may cost more overall because you are not reducing the principal during the early years.
How long can you stay interest only?
This depends on the lender and product, but interest-only periods are often limited to a set number of years.
Do interest only repayments increase later?
Yes. Once the loan switches to principal and interest, repayments usually rise.
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