What is an interest only home loan?

An interest only home loan means that during the interest only term, you only pay interest charges on your home loan (the amount the bank charges you on your outstanding balance), not the principal component (the amount you pay to reduce your balance).

Why choose an interest only home loan?

There are certain benefits to choosing an interest only home loan. These include:

  • A way to manage your finances by reducing your monthly repayments.

  • Access to extra cash as you will not be paying the principal amount.

  • Possible tax benefits if you’re an investor.

Important things to consider

  • Your balance (the principal amount) will not reduce during the interest only period.
  • Interest rates for interest only home loans may be higher than if you were paying principal and interest (P&I).
  • As you’re only paying the interest amount on your home loan during your interest only period, you won’t be reducing the balance (the principal component), which means you’ll pay more interest over the life of your loan.
  • There are limits to how long you can have interest only periods – the maximum interest only period at any one time is five years for owner occupiers and 10 years for investors (credit criteria applies).
  • Interest only is not available in the last five years of your loan.
  • When your interest only period ends, your home loan repayments will automatically change to principal and interest (P&I). This means your repayments will increase as you start paying off your loan balance.
  • It’s important to know what the expiry date of your interest only home loan is and make plans to allow for the expected  increase in repayments. 

How interest only will affect your repayments

With an interest only home loan you only pay the interest amount. This is for a set interest only period before your home loan automatically reverts to principal and interest repayments. Interest only payments are lower than if you were paying both the principal and interest components, however your loan balance won’t be reducing. 

At the end of your interest only period, the balance of the loan must be paid back to the bank over the period remaining before the end of the loan term. This means that the principal and interest repayments will be higher than they would have been before the interest only period.

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Important information

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.