Interest-Only Loan
Finance & Loans
A loan where you only pay interest for a set period, without reducing the principal balance.
Full Explanation
During the interest-only period (typically 1 to 5 years), your repayments are lower because you are not paying down the loan balance. This maximises cash flow and keeps tax-deductible interest payments higher. At the end of the interest-only period, the loan reverts to principal and interest repayments, which are significantly higher. Most investors use interest-only loans on investment properties while paying down their non-deductible home loan faster.
Example
On a $500,000 loan at 6%, interest-only repayments are $2,500/month compared to roughly $3,000/month on principal and interest over 30 years.
Frequently Asked Questions
How long can I get interest-only for?
Most Australian lenders offer interest-only periods of 1 to 5 years for investment loans. You can often extend or roll into another interest-only period, subject to lender approval and serviceability at the time.
Is interest-only bad for building wealth?
Not necessarily. While you are not paying down the loan, the freed-up cash can be directed to an offset account or used to acquire additional properties. The strategy works best when combined with strong capital growth.