Interest-only loan
A loan where, for a set period, you pay only the interest and none of the principal.
- Lower repayments during the interest-only period
- The loan balance does not reduce
- Repayments rise when the period ends
How it works
Interest-only periods usually run up to 5 years for investment loans. After that, the loan reverts to principal and interest unless extended or refinanced.
The trade-off
Lower repayments can help cash flow, but you build no equity through repayments and pay more interest overall.
Some investors use interest only on investment loans and pay down their home loan instead. Whether that suits you is a question for your broker and accountant.
Common questions
Are interest-only rates higher?
Usually slightly higher than principal and interest rates.
Can I extend an interest-only period?
Sometimes, subject to the lender's assessment at the time.
Related terms
Sources
General information only. It does not consider your objectives, financial situation or needs, and is not financial, credit, tax or legal advice. Rules change, so check current law and get advice from a licensed professional before acting.