Last updated: August 2026.
Interest-Only Home Loans in 2026: Who They're For and What They Really Cost
Quick answer: An interest-only home loan lets you pay only the interest for an agreed period, then switch to principal and interest for whatever term is left. Your repayment drops. Your loan balance does not move. On an $800,000 loan at an illustrative 6.00% p.a., interest only costs $4,000 a month against $4,796 on principal and interest. When a 5 year interest-only period ends, that same $800,000 has to be cleared over 25 years instead of 30, and the repayment jumps to $5,154 a month, an increase of 29%.
What is an interest-only home loan?
An interest-only home loan is an ordinary home loan with the principal repayments switched off for a set period. Each month you pay the lender the interest that has accrued and nothing more. At the end of the interest-only term, the loan reverts to principal and interest over the years that remain.
Three things follow from that, and they are the whole story:
- Your repayment during the interest-only period is lower, sometimes a lot lower.
- You build no equity through repayments. Any equity you gain comes from the property rising in value.
- Your repayment after the interest-only period is higher than it would ever have been on principal and interest, because the same balance now has fewer years to run.
Interest only is a cash-flow tool, not a cheaper loan. Used on purpose, for a defined reason, over a defined window, it is one of the most useful structures in Australian lending. Used because the repayment looked affordable on the day, it is one of the most expensive.
Interest only vs principal and interest: the numbers on an $800,000 loan
| Interest only for 5 years, then P&I | Principal and interest from day one | |
|---|---|---|
| Monthly repayment, years 1 to 5 | $4,000 | $4,796 |
| Cash flow difference | $796 a month, $47,760 over 5 years | n/a |
| Loan balance after 5 years | $800,000 | $744,485 |
| Principal repaid in 5 years | $0 | $55,515 |
| Monthly repayment from year 6 | $5,154 | $4,796 |
| Total repaid over 30 years | $1,786,242 | $1,726,445 |
| Total interest over 30 years | $986,242 | $926,445 |
Read the last two rows twice. Five years of lower repayments cost roughly $59,800 in extra interest over the life of the loan, and that is before you allow for the rate premium most lenders charge on interest-only loans.
The trade is real, though. You kept $47,760 of cash in years one to five. Whether that was a good deal depends entirely on what the money did. Sitting in a transaction account, it was a bad trade. Servicing a second property, funding a build, or covering the year one income stopped, it can be an excellent one.
Before you commit to a structure, run your own figures through the loan repayment calculator and compare both repayment types at your actual loan size.
What happens when the interest-only period ends
This is the part borrowers underestimate. The balance has not moved, so the full amount now has to be repaid across a shorter run of years. Same debt, less time, bigger repayment.
| Loan balance at reversion | Interest-only repayment | P&I repayment over the remaining 25 years | Monthly increase |
|---|---|---|---|
| $600,000 | $3,000 | $3,866 | $866 |
| $800,000 | $4,000 | $5,154 | $1,154 |
| $1,000,000 | $5,000 | $6,443 | $1,443 |
| $1,200,000 | $6,000 | $7,732 | $1,732 |
Same assumptions as above: 6.00% p.a. illustration, 30 year original term, 5 year interest-only period.
Who actually uses interest-only loans
Property investors
This is the main use case. Rental income is assessable, interest on an investment loan is generally deductible while the property is genuinely available for rent, and principal repayments are not deductible at all. Plenty of investors run interest only on investment debt while directing every spare dollar at non-deductible debt on the home they live in. That is the logic behind negative gearing, which from 1 July 2027 is limited to new builds on residential property unless you held the place at 7:30pm AEST on 12 May 2026, and behind debt recycling, and it is why our investment loan service sees interest-only requests far more often than owner-occupier ones.
Get the tax side signed off by your accountant. RyRo structures the lending, your accountant confirms the deductibility.
Upsizers bridging two properties
If you buy before you sell, the bridging facility usually runs interest only or capitalises interest until the old place settles. That is a genuinely short window, normally six to twelve months, and it is exactly the kind of defined purpose interest only was built for. See the Sydney bridging loan guide for how the peak debt and end debt maths works.
Households with a temporary drop in income
Parental leave, illness, a redundancy between roles. Several major lenders publish parental leave options that include switching to interest only for the leave period, alongside reduced or paused repayments. It is a hardship-adjacent tool used before things go wrong, and it beats missing repayments. Interest still accrues on the full balance while you do it.
Construction and renovation borrowers
On a construction loan you pay interest only on the funds drawn so far, which is why repayments start small and climb with each progress payment. That is standard across the market rather than a special request. Our construction loan service walks through the draw schedule and what happens at practical completion.
Owner-occupiers who plan to rent the place out later
If you are keeping your current home as an investment when you upgrade, the structure you set up now matters, because the ATO looks at the purpose of the borrowing. There is more on that in buying your next home and renting out the first.
What APRA and lenders allow in 2026
Interest only is not restricted the way it was last decade, but the serviceability rules around it are tighter than most borrowers expect.
There is no cap on interest-only lending. APRA introduced a benchmark in March 2017 limiting new interest-only lending to 30% of new residential loans. It was always described as temporary, and it was removed from 1 January 2019. Nothing has replaced it. Any lender can write as much interest-only business as it wants.
The serviceability buffer is 3 percentage points. Lenders must assess you at your actual rate plus at least 3%. APRA has held that setting since October 2021 and confirmed it remains at 3% alongside the new debt-to-income rules.
From 1 February 2026, high debt-to-income lending is rationed. Banks can write no more than 20% of new lending at a debt-to-income ratio of 6 times or higher, measured separately for their owner-occupier book and their investor book. If you are an investor stacking a second or third loan, this is the constraint that bites first, and it means which lender you apply to, and when in their quarter you apply, now genuinely matters.
Interest-only loans are assessed on the residual principal and interest term. A 30 year loan with a 5 year interest-only period is assessed on the 25 year principal and interest repayment, at your rate plus the buffer. In other words, choosing interest only reduces your borrowing power rather than increasing it. Borrowers are regularly surprised by this. Test it yourself with the borrowing power calculator.
Maximum terms vary by lender and by loan purpose. Westpac, as one published example, allows up to 5 years of interest-only repayments over the life of an owner-occupied loan and up to 15 years on an investment loan, subject to approval. Other lenders sit at 5 years for owner-occupiers and 5 or 10 years per term for investors. Owner-occupier interest only is not banned, but you need a reason the lender accepts and a credible exit.
Interest-only loans usually carry a rate premium too
Westpac states it plainly on its own product page: interest rates for loans with interest-only repayments are higher. That is the market-wide pattern, not a one-bank quirk. Comparison site money.com.au listed advertised interest-only rates starting from 5.92% p.a. (comparison rate 7.57% p.a.) in mid August 2026, and the gap between an interest-only rate and the equivalent principal and interest rate differs by lender and by whether the loan is owner-occupied or investment.
The size of the premium matters more than people think. On an $800,000 loan, every extra 0.25% is $2,000 a year, and you are paying it on the full balance the whole time because nothing is coming off the principal.
How to avoid the reversion shock
- Diarise the expiry date today. Not the month, the date. Put a reminder six months before it.
- Start the conversation six months out. Extensions, restructures and refinances all need time, income evidence and a valuation. Two weeks out you have no options left.
- Stress test the reverted repayment now. Take the figure from the table above, add it to your budget for three months and see whether it actually clears. If it does not, you need a plan, not a hope.
- Use an offset instead of raw interest only where you can. Principal and interest with a well-fed offset gives you flexibility without the balance freeze. Model it on the offset calculator.
- Refinance or restructure before expiry, not after. Once you are on the higher repayment your servicing looks worse to the next lender. Our refinancing service handles this, and the investment property refinance guide covers the investor version.
- Release equity properly if that is the goal. Cash out for a deposit is a different conversation to an interest-only extension. That is what our equity release service is for.
A Castle Hill example
A couple own their home in Castle Hill, worth about $1.6 million with $600,000 still owing. They release equity and buy an investment townhouse in Rouse Hill for $850,000 with an $680,000 investment loan.
- Interest only at 6.00% illustration: $3,400 a month.
- Principal and interest at the same rate: $4,077 a month.
- Rent at $650 a week: about $2,817 a month before costs.
On interest only they are topping up roughly $583 a month before expenses and tax. On principal and interest it is about $1,260. They choose interest only for five years and push the $677 a month difference straight onto the non-deductible Castle Hill loan, which is the part of their debt that earns them nothing at tax time.
The catch they plan for from day one: at the end of year five that investment loan reverts to about $4,381 a month. They know the number, they have it in the budget, and they will review the whole structure with their broker in year four. If you want the same mapped out for your situation, our Castle Hill mortgage broker team does this every week, and you can book a free strategy call to start.
Again, the tax treatment belongs to your accountant. What we control is the loan structure, the lender choice and the timing.
Talk to a Sydney broker before you switch to interest only
Interest only is a structure decision, not a product you shop on rate alone. The right question is not "can I get interest only", it is "what is this cash flow going to do, for how long, and what happens on the day it ends".
RyRo Loan Centre structures interest-only lending for investors, upsizers and business owners across Sydney and the Hills District. We will show you the reversion number before you sign, not after. Book a free strategy call, get in touch, or read more about how we work as a Sydney mortgage broker.
Quick answers
Frequently asked questions
It depends on whether you have a specific job for the cash flow. For investors holding a property while paying down non-deductible home debt, for upsizers bridging two settlements, or for a household covering a defined period of reduced income, interest only can be the right structure. For an owner-occupier simply trying to make the repayment fit, it is usually a mistake, because you pay more interest overall and you face a bigger repayment later.
It varies by lender and by loan purpose. Owner-occupied loans are commonly capped at 5 years of interest only over the life of the loan. Investment loans typically allow longer, and Westpac publishes up to 15 years on investment loans subject to approval, while other lenders sit at 5 or 10 years per term. Extensions are possible if you have not used your maximum, but they require a fresh assessment of your income, expenses and liabilities.
Yes. There is no regulatory ban and no lending cap. APRA's 30% interest-only benchmark was removed from 1 January 2019 and nothing replaced it. What you do need is a reason the lender accepts, evidence you can afford the reverted repayment, and an exit plan. Expect a higher rate than the equivalent principal and interest product.
No, it usually reduces it. Lenders assess interest-only loans on the residual principal and interest term, so a 30 year loan with 5 years of interest only is tested on the 25 year repayment, at your rate plus APRA's 3 percentage point buffer. That is a higher assessed repayment than a plain 30 year principal and interest loan, which cuts your maximum borrowing.
On a $800,000 loan at an illustrative 6.00% p.a. with a 5 year interest-only period, repayments go from $4,000 a month to $5,154, an increase of $1,154 or about 29%. Larger loans move more in dollar terms: $1,000,000 goes from $5,000 to $6,443. If your rate has also risen since settlement, the jump is bigger again.
Only in the short term. The monthly repayment is lower while the interest-only period runs, but the total interest is higher because your balance never falls. On the $800,000 example, five years of interest only costs about $59,800 more in total interest over 30 years, before allowing for the rate premium lenders charge on interest-only products.
Usually yes on a variable interest-only loan, and many borrowers park spare cash in a linked offset account instead so it stays accessible. Fixed rate loans have prepayment thresholds and break costs. Check the specific product terms, because paying down principal on an investment loan can affect your tax position and is worth discussing with your accountant first.
Interest only reduces your required repayment by switching off principal. An offset account reduces the interest you are charged by netting your savings balance against your loan balance, while you keep making full repayments. Offset gives you flexibility without freezing your loan balance, which is why we often recommend it in place of interest only for owner-occupiers.
Yes, and it is normally the better move. Refinancing while you are still on the lower repayment means your servicing position looks stronger to the new lender than it will after the reversion. Start six months before expiry so there is time for valuations, income evidence and settlement. Talk to our refinancing team or contact us and we will map the timing.
Generally yes. Lenders including Westpac state that interest rates on interest-only repayments are higher than on principal and interest. The size of the premium varies by lender and by whether the loan is owner-occupied or an investment, which is one of the main reasons to compare across lenders rather than accepting your current bank's number.
