Interest-only loans: who it's for

Most home loans are principal-and-interest loans, which means that some of each repayment goes towards reducing the amount borrowed, called the principal, while the rest pays the interest.

Over time, this will eventually pay off the loan.

By contrast, with an interest-only loan, for an agreed period you can pay only the interest on the amount you have borrowed while the principal remains unchanged.

This is particularly helpful for people who want to pay the smallest repayment amount each month. The downside is that your debt will remain unchanged during the interest-only period.

It also means that once the interest-only period expires and you return to principal-and-interest, your repayments will be higher in order to pay off the loan by the end of the term.

An interest-only option is available with all of loans.com.au’s home loan packages, to approved customers.

For more information, please see our home loan answers.

Using an offset account on an interest-only loan

Some borrowers use a popular strategy to reduce the interest they pay on an interest-only loan.

They get an interest-only loan with a redraw offset facility, such as that offered by loans.com.au, and make extra payments each fortnight or month into the redraw offset facility.

The extra money in the redraw offset facility offsets some of their interest while giving them the flexibility to easily redraw the money if they need it.

Who uses interest-only loans

According to ASIC, in 2015 one in four owner occupiers had an interest-only loan while 2 in 3 investors had an interest only loan.

Many investors preferred an interest-only loan due to the lower monthly repayment amounts, allowing them to save their cash flow and put this towards increasing the overall value of the real estate. After the property is sold for a profit, the mortgage can be paid off in one payment.