What you need to know about Interest Only loans

Interest only is exactly what it says it is: it’s a loan product that allows you to repay the interest accrued on the loan. During an interest only period, you don’t pay off any of the principal loan amount.

The main benefit of an interest only loan is that your repayments are lower, however, in the vast majority of cases, over the life of your loan you will end up paying more on interest only.

Interest only can be a good option for investment loans especially if you still have money owing on your owner-occupied home loan. There are some banks that don’t allow interest only on owner occupier properties anymore - speak to your Adviser for the right advice.

The most popular interest only period is usually five years and at the end of that time, there are four options, depending on which lender you are with.

  • A lender may allow you to complete a form and go back into an interest only period.
  • Some lenders will want to fully assess you - as if it is a new application - to make sure that you are still in a position to pay off interest only.
  • If your lender requires you to go through that process, you then have the option to refinance to another lender.
  • Or you can do nothing, which means your loan will revert to interest and principal repayments.

Some banks are tightening up the length of time you can have a loan on interest only, which can affect people with rental properties if they are dependant on the rent covering the mortgage. Be careful to ask the bank how long you are allowed to be interest only for, so you can plan well in advance if something has to change.

If you are considering an interest only arrangement, ask yourself these questions.

  • When the interest only period expires, can I afford a higher repayment?
  • Am I in a position where I won’t need to dip into my offset account?
  • Are the short term benefits more valuable to me than the long term costs?

Sometimes when an interest only loan expires, it’s the first time in years that you will actually look at your loan package. It’s always a good time to review your mortgage and if it’s time to restructure, your mortgage adviser can help guide you in the right direction.