What are the maximum interest-only periods on home loans?

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on November 16, 2021 Fact Checked
What are the maximum interest-only periods on home loans?

Whether you’re an investor or owner occupier, paying interest-only is one avenue to lower monthly repayments, but how long can you do this?

Borrowers choose interest-only loans for a variety of reasons, but the main effect of choosing ‘IO’ is lowering your mortgage repayments. While you don’t chip away at the principal, IO loans can be used to minimise costs while settling into a property, finding tenants, or to realise capital growth then sell later to pay off the home loan in its entirety.

However, not all lenders are made equal when it comes to interest-only periods. Some may only allow for a few years, while others allow for a lot longer - it can also differ based on whether you’re an owner occupier or investor, plus how much of a deposit you have saved up.


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The table below displays interest-only home loans.

Lender

Variable
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Fixed
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Package Fixed Rate Home Loan (Interest Only) 2 Years (LVR 80%-90%)

    Variable
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    Orange Advantage Investment Loan (Interest Only) ($150k-$500k)

      Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of May 22, 2022. View disclaimer.

      Banks' and Lenders' Maximum Interest-Only Periods

      Many institutions Savings.com.au spoke to had a maximum IO period of about five years however there were some variations. You’ll also have to double check if the IO period applies only to construction loans. Of the near 40 lenders Savings.com.au reached out to, the only lenders to not respond in time for deadline was Westpac.

      Institution

      Max IO period, owner occupier home loans (years)

      Max IO period, investor home loans (years)

      CBA

      5

      5

      NAB

      5

      10

      ANZ

      5

      10

      86 400

      5

      5

      AMP

      5

      5

      Athena

      3-5

      3-5

      Bank of Queensland

      5

      5

      Bankwest

      5

      10

      Bendigo & Adelaide Bank

      5

      5

      Citi

      Conditional

      5

      Gateway Bank

      5

      5

      Greater Bank

      5-10

      5-10

      Great Southern Bank (formerly CUA)

      3

      5

      Heritage Bank

      N/A

      5

      HSBC

      3

      5

      homeloans.com.au

      5

      10

      ING

      5

      10

      loans.com.au

      5

      5

      Macquarie Bank

      10

      10

      ME Bank

      5

      5

      Nano

      5

      5

      Newcastle Permanent

      5

      5

      People’s Choice Credit Union

      10

      10

      Suncorp

      5

      10

      Teachers Mutual Bank

      5

      5

      Tic:Toc

      5

      5

      UBank

      5

      10

      Virgin Money

      5

      5

      WLTH

      5

      3-5

      Yard

      5

      5

      Commonwealth Bank

      CBA’s maximum interest-only period is five years, for both owner occupiers and investors.

      NAB

      NAB’s maximum IO period is five years for owner occupiers, and 10 years for investors.

      ANZ

      ANZ’s maximum IO period for owner occupiers is five years, while for investors it’s 10 years.

      Westpac did not respond to Savings.com.au's correspondence.

      86 400

      Neobank 86 400 has a maximum interest-only period of five years for both owner occupiers and investors.

      AMP

      AMP’s maximum IO period is five years for both owner occupiers and investors.

      Athena

      For variable interest rates, the maximum interest-only period is five years and for fixed rates, it’s three years, for both owner occupiers and investors.

      Bank of Queensland

      For BoQ the maximum IO period for both owner occupiers and investors is five years.

      Bankwest

      Bankwest’s maximum interest-only period for owner occupier home loans is five years, and for investor loans it’s 10 years, “subject to full serviceability assessment”.

      Bendigo and Adelaide Bank

      Both banks feature a maximum IO period of five years for owner occupiers and investors.

      Citi

      The IO repayment option has an initial period of up to 5 years where the loan is for “non-owner-occupied purposes”.

      The IO repayment option may be available on request where the loan is for an owner-occupied purpose. The IO period may be extended on request, subject to approval by Citi.

      Gateway Bank

      Gateway Bank’s maximum interest-only period for both owner occupied and investor home loans is five years.

      Greater Bank

      Greater Bank’s initial maximum IO period for variable rate loans is five years, however both owner occupiers and investors can apply for an additional five years.

      For fixed loans, the maximum IO period corresponds with the selected fixed loan term.

      Great Southern Bank

      The maximum IO period for owner occupiers is three years, and five years for investors. For construction loans (both investor and owner occupier) it’s 12 months.

      Heritage Bank

      Heritage does not offer interest-only loans for owner occupiers, but the maximum period for investors is five years.

      HSBC

      HSBC has a maximum IO period of five years for investors, and three years for owner occupiers.

      homeloans.com.au

      For owner occupiers the maximum IO period is five years, while for investors it’s 10.

      ING

      ING's interest-only terms are typically 1-5 years, however can be extended up to five years for owner occupiers and 10 for investors, subject to re-assessment.

      loans.com.au

      The maximum IO period for new lending is five years, for both owner occupiers and investors.

      Macquarie Bank

      Macquarie’s interest-only period is a maximum initial period of five years and can be extended by a further five years “subject to a full credit assessment” and approval, and must not exceed a total of 10 years from the original settlement date. This applies for both owner occupiers and investors.

      ME Bank

      For ME Bank the maximum IO period for both owner occupiers and investors is five years.

      Nano

      Nano’s maximum interest-only period is five years and applies to both owner occupier and investor home loans.

      Newcastle Permanent

      Newcastle Permanent’s maximum IO period for both owner occupiers and investors is five years.

      People’s Choice Credit Union

      There are a couple caveats with People’s Choice’s IO periods. The initial interest-only period is up to a maximum of five years. However, on review, a further five year term can be offered up to an overall maximum of 10 years.

      This interest-only term is the same for owner occupied and investment loans. However, interest-only terms for owner occupied loans are used only for construction purposes or bridging finance.

      Suncorp

      For Suncorp the maximum IO period for owner occupiers is five years, and for investors 10.

      Teachers Mutual Bank

      The maximum term for an interest-only loan is five years. This policy applies to both owner occupiers and investors of Teachers Mutual Bank, Health Professionals Bank, Firefighters Mutual Bank and UniBank.

      Tic:Toc

      All IO loans have a maximum period of five years. However, on IO loans the maximum total loan term is 25 years, as opposed to loans paying P&I which are 30 years.

      Tic:Toc says less than 3% of its settled loans pay interest-only, the majority being for investors.

      UBank

      UBank allows up to five years IO for owner occupiers, and 10 years for investors.

      Virgin Money

      For Virgin Money, the maximum IO period for both owner occupiers and investors is five years.

      WLTH

      Non-bank lender WLTH’s maximum IO period breakdown is as follows:

      • 5 years for owner occupiers at 80% LVR or less

      • 5 years for investors at 80% LVR or less

      • 3 years for investors >80% LVR

      Yard

      Non-bank lender Yard has a maximum IO period of five years, applicable for both owner occupiers and investors.

      Popularity of interest-only home loans

      Interest-only loans now make up a relatively small portion of lending in Australia. Full-year results from Australia’s largest bank, Commonwealth Bank, showed interest-only home loans made up just 12% of its $516 billion total home loan portfolio in June 2021, down from 15% of $498 billion in December 2020, and 16% of $485 billion in June 2020.

      In 2017, the Australian Prudential Regulation Authority (APRA) placed limitations on the amount of IO loans banks can provide new customers. Interest-only loans could amount to only 30% of new residential loans, with tough restrictions on IO loans to customers over 80% LVR. However APRA removed this rule in late 2018. Prior to the crackdown, ‘IO’ loans made up nearly 40% of the mortgage market, according to the Reserve Bank, with 23% of owner occupiers taking out IO loans, and nearly two-thirds of investors. Even with restrictions eased, IO loans make up a small portion of the market.

      Pros of a longer interest-only period

      • Lower repayments: You’ve just paid stamp duty, conveyancing fees and a deposit - chances are you’re feeling the pinch a bit. Interest-only payments lower your mortgage repayments while you find your feet, or find tenants if an investor.

      • Tax considerations for investors: Investors can claim a number of items on their investment property, including mortgage interest against their total income. By choosing an IO loan and claiming expenses, chances are you could spend near zero on mortgage repayments as an investor for a few years.

      • Realise capital growth: If you’re looking to sell a few years down the track, given the way Australian property prices have gone, you could realise strong capital growth while paying IO and keeping that cash you’d have paid on the principal for other expenses. Then when it comes time to sell you can pay off the loan in full. Of course, capital growth isn’t guaranteed.

      Cons of a longer interest-only period

      • Don’t chip away at principal: You’re not actually chipping away at the home’s value - only treading water paying interest every fortnight or month, and hence not building any equity this way.

      • Higher interest rates: Recent RBA data shows the average interest rate on outstanding owner occupier IO loans is 4.11% p.a., while for investors it’s 4.29% p.a. - this is much higher than loans paying principal & interest.

      • High revert rates: After the IO period ends, you might be automatically placed on what’s called a ‘revert rate’, which is often much higher than a bank’s discounted variable rate. You can refinance, but you’ll have to be diligent.

      • Bigger deposits required: IO loans often require a larger deposit to account for the additional risks and equity concerns. Often IO loans require a minimum 20% deposit, and sometimes up to 40%.

      • Capital growth concerns: The risk with IO loans is that capital growth isn’t guaranteed. If property prices head south and you haven’t built any equity (as you would by paying the principal), you could be in a bit of pain if it comes time to sell.

      In the interest of full disclosure, loans.com.au and savings.com.au are both part of the Firstmac Group.


      Photo by Mila Mulder on Unsplash

      Disclaimers

      The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. 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. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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      author-avatar
      Harrison is Savings.com.au's Assistant Editor. Prior to joining Savings in January 2020, he worked for some of Australia's largest comparison sites and media organisations. With a keen interest in the economy, housing policy, and personal finance, Harrison strives to deliver and edit news and guides that are engaging, thought-provoking, and simple to read.

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