Compare interest-only home loans

Interest-only home loans provide a practical way for investors and borrowers to temporarily lower their mortgage payments. Interested in exploring this option further? Commence your comparison today.

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interest only home loans

Interest only home loan comparisons on Mozo - last updated 22 February 2024

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  • Fixed Home loan

    70-80% LVR, Investment, Interest Only

    interest rate
    comparison rate
    Initial monthly repayment
    6.64% p.a.
    fixed 3 years
    6.33% p.a.

    Competitive rate tiers for investors only. Leverage the equity you have built up for a lower interest rate. Enjoy a super-fast application process. Split up to 10 loans against your property. Optional offset accounts. Unlimited fee-free transactions. Interest only option.

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    Details
  • Choice Home Loan

    Owner Occupier

    interest rate
    comparison rate
    Initial monthly repayment
    6.74% p.a. variable
    6.77% p.a.

    Competitive variable interest rate. No establishment or ongoing monthly fees to pay. Optional offset account available for 0.10%. Unlimited redraws. Extra repayments allowed. No minimum loan amount.

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    Details
  • Basic Variable

    Owner Occupier, Interest Only, LVR <80%

    interest rate
    comparison rate
    Initial monthly repayment
    7.14% p.a. variable
    6.67% p.a.

    Compare
    Details
  • First Home Buyer Variable Home Loan

    Advantage Plus, Owner Occupier, Interest Only, LVR >90%

    interest rate
    comparison rate
    Initial monthly repayment
    6.24% p.a. variable
    6.87% p.a.

    Compare
    Details
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*WARNING: This comparison rate applies only to the example or examples given. Different 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. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

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What are interest-only home loans and how do they work?

When it comes to taking out a home loan, there are plenty of choices to make. Which lender should you go with? How much do you need to borrow? Should you fix or go with a variable rate? Those are all important considerations, but so too is the type of repayments you want to make on your loan: principal and interest (P&I) repayments or interest-only (IO) repayments?  

For some borrowers, going interest-only for a set period of time is a convenient way to ease themselves into the loan by initially making lower repayments. That’s because - during the interest-free period - mortgage holders will only be required to pay off the ‘interest’ part of the loan, rather than both the interest and the loan principal (i.e. the amount that was borrowed).   

Interest-only mortgages aren’t without their drawbacks though, as they may well prove a more expensive option over the long-run. So if you’re contemplating making interest-only repayments on your mortgage, you’ll want to crunch the numbers first and familiarise yourself with all of the elements involved. 

Interest-only repayments scenario: James and Elle buy a home  

James and Elle are ready to purchase a home. But before they take the plunge, the couple want to consider the cost of making interest-only repayments for the first five years of their home loan, compared to making principal and interest repayments from the start.  

To do this, James and Elle used ASIC Moneysmart’s interest-only mortgage calculator to work out the costs involved on a $400,000 home loan with an interest rate of 3.20% being paid off over 25 years. The couple also plan to make their repayments on a monthly basis. 

They find that over the first five years of the loan (the interest-only period) they would need to make interest-only repayments of $1,067/month. Once that interest-free period ends, their monthly repayments would increase to $2,259 for the remaining 20 years of the loan. 

Comparatively, if they chose to opt for principal and interest repayments, James and Elle  would need to make monthly repayments $1,939 for the 25-year loan period. 

The crux of it? While the couple’s repayments for the first five years would initially be lower if they opted to make interest-only repayments, they would end up paying $24,462 more over the life of the loan.

What are the advantages of interest-only home loans? 

  1. Lower initial repayments: The major attraction of opting to make interest-only repayments is that the amount you’ll need to pay back over the interest-only period will be lower than it would be if you opted to make principal and interest repayments. This could make it easier for borrowers to purchase a property sooner, or they could redirect the savings made towards paying off other types of debt with higher interest rates e.g. a personal loan or a credit card. 

  2. Tax incentives for investors: If you’re a property investor you may also be able to benefit from tax deductions associated with the interest-only repayments made on an investment loan. According to the ATO, investors are able to ‘claim a deduction for the interest charged on the loan or a portion of the interest.’

What are the risks of an interest-only home loan? 

  1. Higher rates: Lenders tend to charge a rate premium to both owner occupiers and investors on interest-only loans, so it’s worth taking that into account when comparing your options. 

  2. You’ll have to make up the repayments: While you may be making lower payments during the interest-only period, once that period finishes your repayments are likely to jump to a much higher level as you are required to start to pay off the principal on your loan as well. And as our scenario above shows, this may result in a greater layout over the life of the loan. 

  3. You might not build equity: While your equity might increase if your property’s value rises, interest-only repayments won't chip away at the loan’s principal, so you might be more vulnerable to a fall in equity, or even negative equity, if values drop.

How do interest-only mortgage rates compare?

As a general rule, mortgage lenders tend to charge higher interest rates on interest-only home loans than they do on principal and interest loans. 

For example, our home loans statistics page (which collates data from over 500 home loans in the Mozo database) shows that since 2018 there’s been a consistent gap of roughly 40-60 basis between the average principal and interest rate for owner occupiers and the average interest-only rate. This rate premium also exists on investment loans, though it’s much smaller. 

That means that if you are thinking about taking out an interest-only home loan, the rate premium you’ll likely need to pay will be an important factor to weigh up when it comes to calculating your overall costs.  

It also highlights the importance of shopping around. There’s a vast array of home loan rates available from various lenders and the difference between them could be equivalent to tens of thousands of dollars over the life of your loan. You can start comparing interest-free home loan rates yourself by checking out our handy comparison table above, or by plugging in your desired loan amount and loan term at the top of that table to view the monthly repayments required on different loan offers.

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JP Pelosi
RG146
Managing editor

Jean-Paul (JP) Pelosi is an experienced journalist and editor who has contributed to many of Australia's leading media outlets including The Guardian, News.com.au, Domain.com.au, Investment Magazine and ANZ's Bluenotes. He has also edited news and communications for large financial services companies such as CommBank, Suncorp, Allianz and Amex. He loves a well told story and applying his editorial experience to content that readers both care about and enjoy. JP heads up our writing team.

More FAQs about interest-only home loans

What’s the difference between principal and interest and interest-only repayments? 

When you take out a home loan the amount you borrow is known as the ‘principal’ while ‘interest’ is the amount you’re charged by a lender to take out the loan - this is determined by the interest rate. So when you make principal and interest repayments, you’re paying back both of those costs. On the other hand, when making interest only repayments, you’re only paying off the interest on your loan - meaning your principal remains the same.  

Can I change my loan to interest-only?

If you’re experiencing financial hardship or you’re looking to reduce the size of the repayments you’re making on your mortgage, you may have the option of switching over to interest-only repayments for a fixed period of time (depending on your lender and loan). This isn’t as easy as clicking a button though, as you’ll likely need to apply online or contact your lender first to get the process started and find out if you’re eligible. 

Are interest-only home loans more expensive?

Interest-only loans tend to be more expensive than principal and interest loans for both owner occupiers and investors. That’s because, on average, lenders charge higher interest rates on these loans, so borrowers will typically pay more interest over the entire life of the loan. 

What happens at the end of an interest-only mortgage? 

Once your interest-only repayment period comes to an end you’ll be required to start making principal and interest repayments, unless you negotiate for an extension with your lender. Remember, principal and interest repayments will likely be much higher than you’re used to paying, so it may be worth getting your budget in order ahead of time.  

How long can you make interest-only repayments for? 

Lenders will only allow borrowers to make interest-only payments on their mortgage for a set amount of time. After all, they want you to repay the loan eventually. Typically, banks allow customers to go interest-only for up to five years, though this can be as long as ten years in some cases. 

Can owner occupiers take out interest-only loans?

Interest-only home loans may be a more popular option with property investors, particularly with the potential tax concessions on offer, but there are still plenty of loans available to owner occupiers as well. In fact, you can see for yourself in the comparison table at the top of this page.  

Can you refinance an interest-only home loan? 

Yes, assuming your loan-to-value ratio (LVR) is below 80% and that you’re in a strong enough financial position, you’ll likely be able to refinance your loan to another lender. There may be eligibility requirements to refinance to another interest-only loan though, but switching to a principal and interest loan should prove simpler. It’s also worth bearing in mind that there may be discharge or upfront fees involved with switching loans. 

Are there tax incentives for property investors? 

Australian property investors have plenty of tax incentives available to them, including the opportunity to claim a deduction for interest (or a portion of the interest) they are charged on their home loan for a rental property. Of course, this applies to the interest being paid on interest-only loans. 

What are the best interest-only home loans? 

Every borrower will have various wants and needs when it comes to choosing a home loan, so there’s no single ‘best’ option out there. After all, whether it’s an interest-only loan, or any other home loan, there are always different interest rates, features and fees involved. 

If you are looking to compare great value home loans though, our Mozo Experts Choice Home Loan Awards are a fantastic place to start. Each year our expert judges analyse hundreds of loans in order to highlight those which offer the best value in categories such as Low Cost Loan, Packaged Home Loan and Investor Home Loan.

Home Loan Reviews

Westpac Home Loan
Overall 1/10
Avoid Westpac at all costs

Westpac have proven to be completely incompetent, lied and their customer service is as poor as I've ever experienced. Even a complaint direct to the Managing Director proved a total waste of effort, as she never had the courtesy to even respond. Australia's worst bank.

Read full review

Westpac have proven to be completely incompetent, lied and their customer service is as poor as I've ever experienced. Even a complaint direct to the Managing Director proved a total waste of effort, as she never had the courtesy to even respond. Australia's worst bank.

Price
2/10
Features
3/10
Customer service
1/10
Convenience
7/10
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1/10
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Macquarie Offset Home Loan (Package)
Overall 10/10
Great service and comparable rates

We have been with Macquarie for over a year and a half. We have our mortgage with them and combined offset bank accounts. They are very competitive in terms of their interest rate. They have great customer service and good services. We like the fact that we can have up to 7 separate offset accounts which we use to put separate savings aside for. We haven’t had any issues however I know their customer service is great.

Read full review

We have been with Macquarie for over a year and a half. We have our mortgage with them and combined offset bank accounts. They are very competitive in terms of their interest rate. They have great customer service and good services. We like the fact that we can have up to 7 separate offset accounts which we use to put separate savings aside for. We haven’t had any issues however I know their customer service is great.

Price
10/10
Features
10/10
Customer service
10/10
Convenience
10/10
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10/10
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Tanya, Western Australia, reviewed 2 days ago
Westpac Rocket Repay Home Loan
Overall 10/10
Where else but Westpac..

Was going to leave the bank for better rates. Retention office made contact with us and provided interest rates much lower than all other banks. Now, I make contact annually direct to the retention office to try and get a better deal. Easy to deal with, contact was immediate by either phone or email. Initial set up of homeloan in branch was easy and Westpac employee was extremely helpful and genuinely wanting to help.

Read full review

Was going to leave the bank for better rates. Retention office made contact with us and provided interest rates much lower than all other banks. Now, I make contact annually direct to the retention office to try and get a better deal. Easy to deal with, contact was immediate by either phone or email. Initial set up of homeloan in branch was easy and Westpac employee was extremely helpful and genuinely wanting to help.

Price
10/10
Features
10/10
Customer service
10/10
Convenience
10/10
Trust
10/10
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