Can You Get an Interest-Only Home Loan in Australia?

Getting an Interest-Only Home Loan in Australia

An interest-only home loan can be useful in the right situation, but lenders assess these applications carefully.

Some lenders may approve interest-only repayments for investors, refinancers and certain owner-occupiers. Others may apply stricter servicing rules, shorter interest-only terms, lower maximum LVRs or require a clear reason for choosing interest-only.

This can surprise borrowers who assume interest-only is just a repayment preference.

To a lender, interest-only lending changes the risk. You are not reducing the loan balance during the interest-only period, and your repayments may increase when the loan switches to principal and interest.

This guide explains how Australian lenders may assess interest-only home loans, based on current policy research.

What is an interest-only home loan?

An interest-only home loan is a loan where you pay only the interest for a set period.

During the interest-only period, your loan balance does not reduce unless you make extra repayments.

For example, if you borrow $600,000 on an interest-only loan, your required repayments cover the interest charged. The $600,000 loan balance usually remains the same during that period.

After the interest-only term ends, the loan usually switches to principal and interest repayments unless you refinance, extend the interest-only period or restructure the loan.

Interest-only vs principal and interest repayments

A principal and interest loan pays down the loan balance over time.

An interest-only loan does not reduce the loan balance during the interest-only period unless you choose to pay extra.

Principal and interest repayments may suit borrowers who want to:

• reduce debt steadily
• build equity through repayments
• pay less interest over the full loan term
• own the property outright sooner
• avoid repayment shock after an interest-only period

Interest-only repayments may suit some borrowers who want to:

• manage cash flow
• hold an investment property
• direct extra cash to an offset account
• fund renovations
• manage temporary income changes
• support a short-term property strategy

The right structure depends on your goals, cash flow and lender policy.

Can you get an interest-only home loan?

Yes, you may be able to get an interest-only home loan.

A lender may consider interest-only repayments if:

• the loan purpose is acceptable
• the requested interest-only period fits policy
• the loan passes servicing
• the LVR is acceptable
• the property is suitable security
• the borrower has a clear reason
• the exit strategy is reasonable
• the application meets credit policy

Interest-only approval is not automatic. The lender still needs to be comfortable that the loan is affordable now and later.

Why lenders assess interest-only loans carefully

Interest-only loans can create more risk because the loan balance does not reduce during the interest-only period.

A lender may ask:

• why does the borrower want interest-only?
• can the borrower afford the repayments after the interest-only period ends?
• is the loan for investment or owner-occupied use?
• how long is the interest-only period?
• what happens when the loan reverts to principal and interest?
• is the borrower relying on future refinance?
• is the LVR too high?
• does the property have strong resale appeal?
• is the borrower’s income stable?

The lender needs to be satisfied that the repayment structure is appropriate.

Are interest-only loans mainly for investors?

Interest-only loans are more common for investment properties.

Many investors use interest-only repayments to manage cash flow and maintain flexibility.

An investor may choose interest-only because:

• investment interest may be tax-deductible, depending on circumstances
• cash flow may be easier to manage
• funds may be kept in an offset account
• the property strategy may be medium-term
• surplus cash may be directed elsewhere
• the investor may plan to sell or refinance later

You should speak with an accountant before making decisions based on tax treatment.

Can owner-occupiers get interest-only loans?

Yes, some owner-occupiers may be able to get interest-only loans, but lenders may review the reason more closely.

An owner-occupied interest-only loan may be considered where there is a clear and reasonable purpose.

Examples may include:

• temporary cash-flow management
• bridging a short-term income change
• funding renovations
• using an offset strategy
• waiting for a property sale
• managing parental leave
• managing temporary reduced income

Some lenders are more cautious with owner-occupied interest-only lending because the borrower is not reducing the debt on their own home.

How long can you have an interest-only period?

Interest-only periods vary by lender and loan type.

Common interest-only periods may include:

• 1 year
• 2 years
• 3 years
• 5 years

Some lenders may allow longer periods in limited cases, especially for investment lending.

The approved period can depend on:

• loan purpose
• borrower strength
• LVR
• property type
• repayment history
• lender policy
• whether it is a new loan or extension
• whether the loan is fixed or variable

At the end of the interest-only period, the loan generally switches to principal and interest unless another arrangement is approved.

What happens when the interest-only period ends?

When the interest-only period ends, repayments usually increase.

This is because you start paying both principal and interest, often over the remaining loan term.

For example, if you take a 30-year loan with a 5-year interest-only period, the principal may need to be repaid over the remaining 25 years.

This can make repayments higher than if you had paid principal and interest from the start.

A lender may assess whether you can afford this future repayment before approving the interest-only loan.

Can you extend an interest-only period?

You may be able to extend an interest-only period, but the lender will usually reassess the application.

The lender may review:

• current income
• current expenses
• repayment history
• property value
• LVR
• loan purpose
• credit conduct
• reason for extension
• remaining loan term
• whether the loan still passes servicing

An extension is not guaranteed. If your income has changed, debts have increased or property value has fallen, the lender may say no.

Can you refinance to another interest-only loan?

Yes, refinancing to another interest-only loan may be possible.

Borrowers may refinance to interest-only to:

• extend the interest-only period
• improve cash flow
• switch lenders
• access a better rate
• restructure investment debt
• consolidate debts
• manage a property portfolio

The new lender will still assess the application under its current policy.

A refinance may be harder if:

• borrowing power is tight
• LVR is high
• income has reduced
• rental income is shaded
• the property is non-standard
• the current loan has poor repayment conduct
• the borrower has already used multiple interest-only periods

Can you switch from principal and interest to interest-only?

Yes, some lenders may allow a switch from principal and interest to interest-only.

This may require a full or partial reassessment.

The lender may ask:

• why do you want to switch?
• is the loan owner-occupied or investment?
• can you afford the interest-only repayments?
• can you afford the future principal and interest repayments?
• has repayment history been clean?
• is the LVR acceptable?
• has the property value changed?
• does the request fit policy?

A simple repayment switch may still involve credit approval.

Can you get interest-only at 90% LVR?

It may be possible with some lenders, but interest-only at high LVR can be harder.

A lender may be more cautious where the borrower has a small deposit or limited equity because the loan balance is not reducing during the interest-only period.

High-LVR interest-only applications may be harder if:

• lenders mortgage insurance is required
• the loan is owner-occupied
• the property is non-standard
• borrowing power is tight
• the interest-only term is long
• the borrower has variable income
• the borrower has credit issues
• the loan relies heavily on rental income

Some lenders may cap interest-only loans at lower LVRs than principal and interest loans.

Can first-home buyers get interest-only loans?

First-home buyers may be able to get interest-only loans, but it may not suit every situation.

A first-home buyer usually wants to build equity and reduce debt over time. Interest-only repayments can reduce required repayments in the short term, but the debt does not reduce unless extra repayments are made.

A lender may be cautious if a first-home buyer wants interest-only because:

• the borrower has limited equity
• LMI may apply
• the property is owner-occupied
• the loan term may become more expensive overall
• repayments may rise later
• the reason for interest-only may not be strong

Some first-home buyers may be better suited to principal and interest repayments.

Can self-employed borrowers get interest-only loans?

Yes, self-employed borrowers may be able to get interest-only loans.

The lender will still need to verify income and confirm affordability.

A self-employed borrower may need:

• personal tax returns
• business tax returns
• notices of assessment
• financial statements
• BAS, where relevant
• business bank statements
• accountant letter, where relevant
• explanation of loan purpose
• evidence of cash flow

If income is variable or documentation is limited, lender choice becomes more important.

Related research: Can You Get a Home Loan with Simple Self-Employed Verification?

Can interest-only help if your income is temporarily lower?

Interest-only repayments can reduce required repayments in the short term, but they are not always accepted as a solution for affordability issues.

A lender may consider temporary income changes such as:

• parental leave
• reduced hours
• business cash-flow timing
• temporary contract gap
• planned sale of another property
• short-term renovation costs
• transition to retirement

But the lender will still need to see that the loan is suitable and affordable.

If the loan only works because repayments are interest-only, the lender may ask whether it remains affordable when repayments switch to principal and interest.

Can investment property rental income support an interest-only loan?

Yes, rental income may support an interest-only investment loan, but lenders usually shade rental income before using it.

The lender may consider:

• current lease
• rental appraisal
• rental statement
• property expenses
• vacancy allowance
• strata fees
• investment loan repayments
• rental income shading
• overall borrower income

Even if the rent covers the interest-only repayment, the lender may still test the loan using higher assessment rates and future repayment assumptions.

Related research: Can You Use Investment Income from Shares or Managed Funds for a Home Loan?

Does interest-only increase borrowing power?

Not always.

While actual interest-only repayments are lower than principal and interest repayments, lenders often assess affordability more conservatively.

A lender may assess the loan using:

• a higher assessment rate
• principal and interest repayments over the remaining term
• a shorter effective repayment period
• buffered repayments
• shaded rental income
• existing debt commitments

This means choosing interest-only does not automatically increase your approved borrowing amount.

Related research: Can a Fully Maintained Company Car Increase Your Home Loan Borrowing Capacity?

Is interest-only more expensive over time?

Often, yes.

Because you are not reducing the loan balance during the interest-only period, you may pay more interest over the life of the loan compared with paying principal and interest from the start.

Interest-only can also be more expensive if:

• the interest rate is higher
• the debt remains larger for longer
• the loan later reverts to higher repayments
• the borrower refinances repeatedly
• property values do not rise
• extra repayments are not made

Interest-only can be useful, but it should be chosen for a clear reason.

Can you make extra repayments on an interest-only loan?

Sometimes, yes.

This depends on the product.

A variable interest-only loan may allow extra repayments. A fixed interest-only loan may have restrictions.

Extra repayments may help reduce interest costs, but some borrowers prefer to keep surplus funds in an offset account instead.

A lender or broker can confirm whether the product allows:

• extra repayments
• offset account
• redraw
• split loan structure
• fixed-rate interest-only repayments
• variable interest-only repayments

The right structure depends on flexibility needs and loan purpose.

Can you have an offset account with an interest-only loan?

Some lenders may offer offset accounts with interest-only loans.

An offset account can reduce the interest charged by offsetting money held in the account against the loan balance.

For example, if your loan is $600,000 and you hold $80,000 in offset, interest may be calculated on $520,000.

An offset account can be useful for borrowers who want:

• cash-flow flexibility
• emergency funds
• renovation funds
• tax separation for investment loans
• the ability to reduce interest without permanently paying down debt

Offset availability depends on the lender and loan product.

What documents do you need for an interest-only loan?

The documents are usually similar to a normal home loan, but the lender may ask extra questions about purpose and affordability.

You may need:

• payslips
• tax returns, if self-employed
• bank statements
• savings statements
• rental statements, if investment
• lease agreement
• property valuation
• current loan statements, if refinancing
• explanation for interest-only request
• evidence of exit strategy, where required
• evidence of future income or sale proceeds, where relevant

The lender wants to understand why interest-only is suitable and how the loan will be managed.

What is an exit strategy?

An exit strategy explains how the borrower plans to repay or manage the loan after the interest-only period.

This may include:

• switching to principal and interest repayments
• selling the property
• refinancing
• using investment income
• using increased employment income
• using sale proceeds from another property
• paying down the loan with savings
• reducing the loan from offset funds

A lender may be more likely to ask about exit strategy where the loan term is shorter, the borrower is older, the loan is investment-related or the interest-only request is unusual.

10 common mistakes with interest-only loans

1. Do not assume interest-only approval is automatic.
2. Do not assume interest-only increases borrowing power.
3. Do not ignore the repayment increase after the interest-only period.
4. Do not choose interest-only without a clear reason.
5. Do not assume every lender allows owner-occupied interest-only loans.
6. Do not wait until the interest-only period expires before checking options.
7. Do not rely on rental income without allowing for shading.
8. Do not ignore higher total interest costs.
9. Do not assume you can extend interest-only later.
10. Do not apply before checking lender policy.

How to improve your chances before applying

Before applying for an interest-only loan, it helps to prepare the application clearly.

Useful steps include:

• confirm why interest-only is needed
• check whether the loan is owner-occupied or investment
• confirm the preferred interest-only term
• check the LVR
• prepare income documents
• prepare rental evidence, if investment
• check future principal and interest repayments
• reduce unnecessary debts where practical
• keep repayment history clean
• prepare an exit strategy if needed
• compare lender policy before submitting the application

The goal is to show the lender that interest-only is suitable and affordable.

Should you choose interest-only or principal and interest?

This depends on your goals.

Interest-only may suit some borrowers who need short-term flexibility or investment cash-flow management.

Principal and interest may suit borrowers who want to reduce debt steadily and pay less interest over the life of the loan.

Before deciding, consider:

• loan purpose
• cash flow
• tax advice
• repayment comfort
• total interest cost
• future repayment increase
• property strategy
• investment timeframe
• offset account use
• lender policy

You should compare the repayments and long-term cost before choosing.

Example scenarios

Scenario 1: Investor buying a rental property

You are buying an investment property and want interest-only repayments for five years.

The lender may consider the request if the loan passes servicing, the LVR is acceptable and rental income is properly verified.

Scenario 2: Owner-occupier wanting lower repayments

You live in the property and want interest-only repayments to reduce short-term cash flow pressure.

The lender may ask why interest-only is suitable and whether you can afford repayments after the interest-only period ends.

Scenario 3: Interest-only period expiring soon

Your investment loan is about to switch to principal and interest.

You may be able to apply for an extension or refinance, but the lender will reassess income, property value and servicing.

Scenario 4: High-LVR interest-only loan

You want to borrow 90% LVR on interest-only repayments.

Some lenders may be cautious because the loan balance will not reduce and mortgage insurance may apply.

So, can you get an interest-only home loan?

Yes, you may be able to get an interest-only home loan in Australia.

The strongest applications usually have:

• clear loan purpose
• acceptable LVR
• stable income
• clean repayment history
• suitable property
• realistic exit strategy
• verified rental income, where investment
• manageable debts
• ability to afford future principal and interest repayments
• a lender whose policy accepts interest-only lending

Interest-only can be useful, but it needs to fit your overall loan strategy and lender policy.

Need help comparing interest-only loan options?

A mortgage broker can help compare lenders that may consider interest-only loans for investors, owner-occupiers, refinancers and borrowers needing short-term repayment flexibility.

We can review your income, property, LVR, rental income, repayment goals and lender options before you apply.

If you are considering interest-only repayments, speak with a mortgage broker who understands how different lenders assess interest-only lending.