Interest Only Loans? Here's How to Decide (2026)

In the ever-evolving landscape of Australian property finance, choosing the right mortgage can feel like navigating a maze. With interest only loans back in the spotlight, many borrowers are asking: are they a savvy financial move or a potential pitfall? Let's delve into the nitty-gritty of interest only loans to help you make an informed decision that aligns with your financial goals and circumstances.

Understanding Interest Only Loans

An interest only loan is a type of mortgage where, for a set period, you pay only the interest charged on the loan, not the principal amount. This means your monthly repayments are lower compared to a principal and interest loan. However, once the interest only period ends, repayments will increase significantly as you begin to pay down the principal.

These loans are typically offered for a period of 1 to 5 years, after which they automatically revert to a principal and interest loan. Interest only loans can be appealing to investors looking to maximise cash flow or homeowners seeking temporary financial relief.

Current Market Rates and Options

As of 2026, interest only loan rates in Australia range from 6.49% to 12%, depending on the lender and the borrower's financial situation. These rates are generally higher than those for principal and interest loans, reflecting the increased risk to the lender.

Eligibility for an interest only loan often requires a higher credit score and a more substantial deposit, typically around 20% of the property value. Lenders may also scrutinise your income stability and future ability to meet higher repayments once the interest only period ends.

Feature	Interest Only Loan	Principal and Interest Loan
Repayment Structure	Interest only for initial period	Principal and interest from start
Monthly Repayments	Lower initially	Higher initially
Interest Rate	6.49% - 12%	5.99% - 10%
Eligibility	Higher credit score, larger deposit	Standard requirements

Steps to Secure an Interest Only Loan

1. Evaluate Your Financial Goals: Determine if an interest only loan aligns with your financial objectives, such as investment strategies or short-term cash flow needs.
2. Assess Your Financial Situation: Review your income, expenses, and future financial commitments to ensure you can handle increased repayments after the interest only period.
3. Compare Lenders: With access to 83+ lenders, Esteb and Co can help you find competitive rates and terms that suit your needs.
4. Apply for Pre-Approval: Secure a pre-approval to understand your borrowing capacity and strengthen your negotiating position with sellers.
5. Submit a Full Application: Once you've found a suitable property, submit your application with all required documentation, including proof of income and a detailed financial statement.
6. Review Loan Terms: Before signing, carefully review the loan terms, including the interest rate, fees, and conditions for switching to principal and interest repayments.

Tips and Considerations

• Understand the Risks: Be aware that interest only loans can lead to higher long-term costs and may not build equity in your home during the interest only period.
• Plan for the Future: Have a strategy in place for when the loan reverts to principal and interest repayments, including potential refinancing options.
• Consult Professionals: Seek advice from financial advisors and mortgage brokers, like those at Esteb and Co, to ensure your decision is well-informed and tailored to your circumstances.
• Consider Alternatives: If long-term affordability is a concern, explore other loan types or repayment strategies that might better suit your financial situation.

Frequently Asked Questions

• Who can benefit from an interest only loan? Investors seeking cash flow flexibility and homeowners needing temporary financial relief may benefit from interest only loans.
• What happens after the interest only period ends? The loan will revert to a principal and interest structure, leading to higher monthly repayments to pay off the loan within the original term.
• Can I refinance an interest only loan? Yes, refinancing is an option that can provide better terms or extend the interest only period, depending on your financial situation and lender policies.
• Are there any tax benefits with interest only loans? For investment properties, interest payments may be tax-deductible, but it is advisable to consult with a tax professional for personalised advice.
• How do interest only loans impact property equity? During the interest only period, you do not reduce the principal, so equity is only increased through property appreciation or additional payments.
• Is an interest only loan suitable for first-time buyers? Generally, first-time buyers might face challenges with interest only loans due to the risk of higher future repayments and the need for a larger deposit.
• What should I consider before choosing an interest only loan? Assess your financial stability, future income prospects, and long-term financial goals to ensure you can manage the loan's demands over time.