The Interest Only Home Loan

An interest-only home loan allows borrowers to pay only the interest on the amount borrowed for a set period, typically between one and five years, though some lenders may offer extended terms. Because repayments during this period do not reduce the principal, they are significantly lower than those of a standard principal-and-interest loan. Once the interest-only period ends, repayments increase as you start paying off both interest and principal. These loans are especially popular with investors who aim to sell the property at a profit before needing to pay off the principal.

Pros of the Interest Only Home Loan

Lower Repayments During the Interest-Only Periods

• Since you’re not repaying the principal, the loan amount remains unchanged. If property prices stagnate or fall, you could face negative equity. Example: If you borrow $500,000 and make only interest payments for five years, your loan balance remains $500,000 at the end of the term.

Higher Repayments Once the Interest-Only Period Ends

• When the interest-only term finishes, repayments increase as you start repaying both principal and interest. This can lead to financial strain if unprepared. Example: A borrower paying $2,083 per month on interest-only may see repayments jump to $3,000 or more when principal payments begin.

Risk of Not Securing an Extension

• If you want to extend the interest-only period but your financial situation has changed or lending criteria have tightened, you may be forced to transition to full repayments sooner than expected.

Higher Overall Interest Costs

• Since the principal remains unpaid during the interest-only period, you end up paying more interest over the life of the loan. Example: A $500,000 loan at 5% interest over 30 years will cost more in total interest if the first five years are interest-only compared to a full principal-and-interest repayment structure.

Cons of the Interest Only Home Loan

Debt Doesn’t Reduce During the Interest-Only Period

• If interest rates fall, borrowers on a fixed-rate loan do not benefit from lower repayments. Example: If your loan is fixed at 6% and rates drop to 4.5%, variable rate borrowers will enjoy lower repayments, while you remain locked at 6%.

Potentially Higher Costs Over Time

• If interest rates stay low for an extended period, you may end up paying more than variable-rate borrowers.

Limited Extra Repayments

• Many fixed-rate home loans impose caps on additional repayments or charge break fees for early payments beyond a certain threshold. This can restrict your ability to pay off the loan faster. Example: If you receive a work bonus or an inheritance, you may not be able to apply the full amount to your mortgage without incurring penalties.

Break Costs and Penalties

• Exiting a fixed-rate loan before the term ends can be costly. Lenders may charge significant break fees, particularly if market interest rates have dropped since you locked in your rate. Example: If you secure a fixed-rate loan at 5.5% and need to refinance or sell your home two years into a five-year term, your lender may impose break fees amounting to thousands of dollars.

We’ll walk you though the process and ensure you are structured for maximum wealth creation and lowest repayments.