Interest only loans and homeowners

Until a few months ago there was no premium charged on interest rates on interest-only loans over and above principal and interest loans. This allowed them to be used strategically in a number of ways at no extra cost.

Examples, some of which may have been your reasons for choosing this option, include

  • For those purchasing a home that could become an investment property in a few years’ time, paying interest only to the bank while paying the equivalent of the principal portion of the loan into an offset account allowed for flexibility in future tax structuring.
  • Wanting to retain access to substantial redraw, or savings in offset without being committed to a monthly repayment based on the loan limit rather than your net borrowings. Again, this needed equivalent principal payments set aside to make sense long term.
  • Where a guarantor loan is involved, by placing the stand alone loan on interest only, the guarantor loan could be paid down much faster and the guarantor released sooner.

Unfortunately strategy is not a set and forget exercise, and changing conditions can necessitate a re-look.

Over the last six months there has been significant pressure from industry regulators on banks to restrict and reduce interest only lending. Coupled with the banks enduring focus on maximising their own bottom line, the result has been increased costs of interest-only loans.

Depending on the lender, there is now up to 0.5% difference in the rates for Interest Only  repayments as compared to Principal and Interest  repayments on home loans, or an extra $500 interest per year per $ 100 000 borrowed.

It’s not to say that interest only isn’t still the best option for some borrowers, but the parameters have changed and re-visiting strategies is a worthwhile exercise.

Where the flexibility of interest only strategies previously carried no cost,  it is now important to understand what the extra interest cost would be and make a call on whether the spend is worthwhile for you.

If you’d like to work through your particular circumstances in more detail to evaluate switching, please give me a call on 0430 383 996 or drop me an email at

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