Interest only investment loans

author-avatar By on September 20, 2021
Interest only investment loans

Interest-only home loans can enable investors to secure a property while minimising their repayments.

A home loan repayment typically consists of two parts - the amount you borrow (the principal), and the interest that the lender charges based on the size of the loan. Typical home loans charge what’s called ‘P&I’ - or principal and interest.

With an interest only home loan, minimum repayments will only cover the interest charges on the loan for an agreed period of time while the principal remains unaffected. Therefore, the ultimate underlying balance won’t reduce during the interest-only period.

Interest rates for interest only home loans are usually higher higher than P&I home loans, but there are still a few benefits to choosing an interest-only loan for the first few years as an investor.


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Buying an investment property or looking to refinance? The table below features interest-only home loans with some of the lowest interest rates on the market for investors.

Lender
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval
VariableMore details
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Investor, Interest Only (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Investor, Interest Only (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
VariableMore details
FREE REDRAW FACILITY

Smart Investor Home Loan (Interest Only) (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 30% deposit
  • No ongoing or monthly fees, add offset for 0.10%
FREE REDRAW FACILITY

Smart Investor Home Loan (Interest Only) (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 30% deposit
  • No ongoing or monthly fees, add offset for 0.10%
FixedMore details

Investor Fixed 1 year (Interest Only)

VariableMore details

Momentum Investment Loan (Interest Only) (LVR < 60%)

VariableMore details
YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*

Variable Home Loan (Interest Only) (LVR < 60%)

YOU COULD WIN $100k TO PAY DOWN YOUR LOAN*
VariableMore details

Low Rate Home Loan - Prime (Interest Only) (Investment) (LVR < 60%)

FixedMore details

Owner Occupier Fixed 3 year (Interest Only)

VariableMore details

Basic Investment Loan (Interest Only) (LVR ≤ 75%)

FixedMore details

myBlue Investment Loan (Fixed Rate) (Interest Only) (LVR < 60%) 3 year

VariableMore details

Investment Back to Basics Special (Interest Only) (New Customer) (LVR ≤ 70%)

VariableMore details

Basic Investment Loan (Interest Only) (LVR < 60%)

FixedMore details

SmartSaver Fixed Investment Loan (Interest Only) 2 Years Special (LVR ≤ 80%)

Rates correct as of October 23, 2021. View disclaimer.

Advantages of interest only investment loans

The main aim of the investment game is to purchase a property that will increase in value over time, and hopefully one day sell for a profit while gathering rental income in the meantime. This is called capital gains.

The idea with interest-only investment loans is that when an investor sells the property, they can use the money to pay off the principal while still making a profit.

Interest-only home loans can also enable investors to secure a property while minimising their repayments. This could be especially useful when trying to find tenants and to minimise other startup costs.

The other advantage is at tax time. During the interest only period,  because you’re not paying off any of the principal on the property, the entire interest-only portion can be claimed as a deduction against your income. In some cases you can also choose to pay interest annually in advance, to help reduce your taxable income.

Disadvantages of interest only investment loans

It’s important to remember that while interest only payments are lower than if you were paying the principal component as well, the loan balance isn’t reducing.

At the end of an interest only period, the balance of the loan must be paid back to the bank over the period remaining before the end of the loan. This means that the principal and interest repayments will often be higher than prior to the interest only period.

Once you start paying both principal and interest, only the interest on your investment home loan can be claimed as a tax deduction.

There is also always a risk with interest-only loans that the property’s value doesn’t sufficiently increase. In this case you may end up with a large debt owing, and the principal on the home loan at sale time outweighs what you sold the property for. When combining that with other investment costs, body corporate fees, rates and more, the costs could start to add up.

In addition, interest only loans usually have higher interest rates compared to principal and interest loans. You will also pay more interest over the life of the loan as you aren’t reducing the loan during the interest only period.


Image by Max Bottinger via Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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author-avatar
Aaron joined Savings.com.au in 2021. He is a finance journalist with a keen interest in property, the share market, and improving financial literacy in young Australians.

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