Best Interest-Only Home Loan Rates

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What is an interest-only home loan?

An interest-only (IO) home loan means you don't repay any of the outstanding principal amount for a set period. IO home loans are the opposite of a typical principal and interest (P&I) home loan.

How to find the best interest only home loan

If you're set on switching over to an interest only loan, there are a few things to consider when comparing your options:

Interest only period

Lenders will generally only allow you to go interest only for a certain portion of the loan period. Most common is five years for owner occupiers and ten years for investors, but there are exceptions. Commonwealth Bank for example allow up to 15 years of interest only payments over the life of investment loans, although you can only go five years at a time.

Loan purpose

You'll also need to find a lender that will allow you to use an interest only loan for the reason you want one. IO loans are often used by property investors, but also suit other specific purposes like construction loans.

Interest only repayments can help manage cash flow during the construction of a new property. Construction loans typically allow you to draw funds progressively through each state of construction, and only charge interest on the amount you've actually borrowed. Once everything is finished, the loan reverts to P&I. Some lenders offer interest only loans, but not construction loans.

Rates and fees

Since you are repaying none of the principal amount through the IO period, the interest rate becomes even more important. In a P&I loan, each repayment you make reduces the amount you're paying interest on, since the outstanding amount comes down. Over time, your interest bill is reduced. With IO repayments the outstanding amount stays the same, so small differences in rates can be even more significant than on a P&I loan.

Here's an example to show you how this works, using a $600,000 30 year home loan.

Worked out using the Savings.com.au home loan repayments calculator and the interest only repayments calculator

Interest only rates are generally slightly higher than equivalent P&I rates. When you're comparing products you should look at both the IO rate and the revert rate, which is the rate you'll be charged once the interest only period ends.

Dominic Beattie

Savings.com.au Editor

"While largely favoured by investors, interest-only loans may also benefit owner-occupiers seeking to reduce their outgoings for a limited time. But there’s only so far that you can kick the can down the road - the principal needs to be repaid eventually, and that temporary pause will pack a punch on your overall interest bill."

How do interest-only home loans work?

Interest-only home loan payments only cover the interest owed on the principal amount. For the duration of the interest only period, your repayments are substantially lower since you are only paying the interest instead of actually paying the loan back.

Once the interest-only period ends, your mortgage shifts back to a principal and interest (P&I) loan repayment structure. This might mean your repayments are higher than they otherwise would have been, and the overall cost of the loan is greater since you end up paying more interest. However, interest only loans can still be useful, often for borrowers looking for temporary relief to free up cash flow.

Interest only loans:

• Generally are for a period of up to five years for owner occupiers and ten years for investors, with some exceptions
• Typically have higher interest rates than owner occupier loans
• Are usually more popular with investors looking to manage multiple home loans at once

Interest-only home loan rates in Australia

Interest only rates are generally higher for owner occupiers than the equivalent rates on principal and interest repayments. According to the most recent RBA data, the average owner occupier rate on new P&I loans in May 2025 was 5.8%, compared to 6.6% for interest only.

Interest-only investment home loan rates

For investment loans, interest only rates are still typically higher than P&I, but the deficit is often not as significant. The average rate on new interest only investment loans in May 2025 was 6% p.a. compared to 5.9% p.a. for P&I repayments.

The RBA data also suggests interest only rates for investors tends to be lower than for owner occupiers - the reverse generally holds for P&I repayments.

Interest only vs Principal & Interest

The table below highlights the difference in monthly and total repayments of an interest-only and principal and interest home loan, based on the average home loan size of $610,000 over 30 years at an interest rate of 5.00% p.a. The interest-only loan term for this example is 5 years, leaving the remaining 25 years with a principal and interest loan.

Worked out using the Savings.com.au home loan repayments calculator and the interest only repayments calculator

Should I get an interest only loan?

An interest-only loan is generally more suited for investors looking to maximise tax-deductible expenses and improve short-term cash flow rather than building home equity.

Interest-only loans tend to be particularly appealing to property investors rather than traditional home buyers. Investors sometimes look to limit non-interest expenses to free up cash for other investments.

Nevertheless interest-only home loans can be still beneficial to owner occupiers looking to manage a number of debts including car loans, personal loans or credit card debts. Interest-only mortgage repayments are typically lower, meaning a greater portion of finances can go towards paying off other debts.

It is important to note that while repayments may initially be smaller, you will likely end up paying more over the life of your mortgage given you accumulate more interest while not paying off the principal over the interest-only period. Interest rates are also typically higher for interest-only loans.

To calculate interest-only home loan repayments and to help determine whether this loan option may be suited to your financial position, check out our Interest-Only Home Loan Calculator.

Benefits of interest-only home loans

Lower repayments

Interest-only loans mean lower repayments since you aren't paying off any of the principal. Temporarily lower repayments during the interest-only period could help you save more money for other expenses including renovations or pay off more expensive debts.

Suits alternative loans

Interest-only loans be useful for short-term loans, such as bridging finance or a construction loan.

Tax deductions

If you're an investor, you could claim higher tax deductions from an investment property. Investors may also look to sell properties within the interest-only period to reduce expenses.

Drawbacks to interest-only loans

Higher rates

The interest rate on an IO loan could be higher than a principal and interest loan, meaning you will pay more over the full term.

Higher repayments after IO term

You pay nothing off the principal during the interest-only period, so the amount borrowed doesn't reduce. That means once the IO period elapses, your repayments will revert higher than they otherwise would have been.

Don't build equity

If your property doesn't increase in value during the interest-only period, you won't build up any equity. This can put you at risk if there's a market downturn, or your circumstances change and you want to sell.

Savings.com.au's two cents

Interest-only loans tend to have more benefits for property investors compared to owner occupiers. An interest only loan can free up an investor's capital, which potentially could go towards further investment and an expanded portfolio. Imagine you switch to interest only on your current mortgage for three years and buy a second property with the spare cash. All going to plan, the property value will increase dramatically over the interest only period, then you can sell for a big profit that dwarves the extra interest you'll pay on the initial loan.

The flip-side is the investments may not pay off (say for example the additional property you buy loses value), then you could end up making a loss in the long run.

In general, owner occupiers are often better off sticking with P&I repayments, barring exceptional circumstances.

Do your research and read the terms and conditions before making a purchase decision.