Interest Only Home Loan

April 18, 2012 by  Filed under: Loans 

In Australia, traditional home loans – those in which borrowers make payments on for interest and principal – are still by far the most common choice. However, with more household budgets squeezed because of national economic issues, seemingly never-ending cost-of-living increases and higher home prices, interest-only home financing is gaining favor among homebuyers.

What Is It?

Interest-only financing originally grew popular with those purchasing property for investment purposes. These products offer buyers many of the same benefits as traditional financing options but they come with lower monthly payments because the borrower isn’t paying on the principal. In fact, many of these loans allow borrowers up to five years to make payments on interest only, which can cut those monthly mortgage payments substantially.


The biggest benefit of interest-only financing is that it affords borrowers lower monthly mortgage payments so they have more money for other things. This is also a good option for those who are building a home or doing renovations on an existing property, especially if they need to pay for a rental property during that time period.

Financially savvy homeowners favor interest-only products because borrowers can take the money they are saving each month and invest the funds into something that can produce a higher yield and make that money work for them.


Interest-only mortgages are not a good choice for long-term financing. By choosing this option, homeowners aren’t paying down their principal and they also aren’t building equity in their homes. If you couple this with a volatile housing market, it could spell trouble when it’s time to sell if homeowners end up owing more on their homes than the homes are worth. This is also known as negative equity and it means that homeowners might have to pay lenders out of their own pockets to make up this difference at the time of sale.

Another drawback is that the interest rate attached to this type of home financing tends to be higher than that of more traditional products.

These loans aren’t meant to encourage people to purchase homes beyond their means. In addition, trying to secure this type of financing in order to pay monthly bills or put food on the table isn’t a good financial choice.

Is It the Right Option?

Borrowers are best able to determine if this is the right option for them but it’s important to consult with a lender to learn more about their specific products and compare rates and terms. Interest-only financing is meant as a short-term solution and it’s a fantastic option in the right circumstances. Although you’re only paying interest for the first portion of your repayment period, the principal is still there and you’ll still be responsible for paying it down as you would with any other mortgage.

Tomorrow Finance compares hundreds of home loans from Australia’s best home loan lenders. Their home loan comparison software can find out how much you can save by getting the best home loan rates.

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