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

Considering an interest-only loan and not sure if it's the right choice for you? You're not alone. Many Australians grapple with the decision of whether to pursue interest-only loans, often enticed by the initially lower repayments but wary of the long-term implications. This guide will help you navigate the complexities of interest-only loans, providing you with the knowledge and confidence to make an informed decision.

Understanding Interest-Only Loans

An interest-only loan is a type of mortgage where, for a set period, you only pay the interest on the amount borrowed. During this initial phase, your monthly repayments are lower compared to a principal and interest loan. However, once the interest-only period ends, repayments will increase as you begin to pay down the principal amount.

Typically, the interest-only period can last for 1 to 5 years. While this can provide temporary financial relief or allow for other investment opportunities, it's important to plan for the higher repayments that will follow. Understanding the mechanics of these loans is crucial to determining if they fit your financial situation and goals.

Current Market Rates and Requirements

In 2026, the Australian mortgage market offers a range of interest rates for interest-only loans, generally spanning from 6.49% to 12%. The rate you secure will depend on various factors, including your credit score, the loan-to-value ratio (LVR), and the lender's policies.

Here are some key factors and requirements to consider:

• Eligibility Criteria: Typically, lenders prefer borrowers with a strong credit history and a stable income. A higher deposit can also improve your chances of securing a favourable interest rate.
• Loan-to-Value Ratio (LVR): Most lenders prefer an LVR of 80% or lower for interest-only loans. This means you should ideally have a deposit of at least 20%.
• Loan Term: While the interest-only period is usually 1 to 5 years, the overall loan term can be up to 30 years. Be prepared for higher repayments once the interest-only period ends.

Steps to Securing an Interest-Only Loan

1. Assess Your Financial Situation: Determine whether an interest-only loan aligns with your financial goals and capacity to handle future repayments.
2. Research and Compare Lenders: With access to over 83 lenders, Esteb and Co can help you find competitive rates and terms that suit your needs.
3. Gather Documentation: Ensure you have all necessary documents, such as proof of income, identification, and details of your current debts and assets.
4. Apply for Pre-Approval: This will give you a clear idea of your borrowing capacity and help streamline the final loan approval process.
5. Consult a Mortgage Broker: Engage with a professional broker from Esteb and Co to navigate the complexities of interest-only loans and secure the best deal.
6. Finalise the Loan: Once approved, review the loan contract carefully before signing to ensure all terms meet your expectations.

Tips and Considerations

When contemplating an interest-only loan, consider these expert tips:

• Plan for the Future: Anticipate how you'll manage the increased repayments once the interest-only period concludes. Create a budget that accommodates these future expenses.
• Invest Savings Wisely: If opting for an interest-only loan to free up cash, ensure any investments offer a higher return than the loan's interest rate.
• Regularly Review Your Loan: Stay informed about changes in interest rates and refinance options to ensure you're always getting the best deal available.
• Understand the Risks: Be aware that property values can fluctuate, and there's a risk that you may owe more than your property is worth if the market declines.
• Seek Professional Advice: Regularly consult with financial advisors and mortgage brokers to ensure your strategy remains aligned with your financial goals.

Frequently Asked Questions

1. What is the main advantage of an interest-only loan? The primary benefit is lower initial repayments, allowing for greater cash flow flexibility during the interest-only period.
2. Are there any downsides to interest-only loans? Yes, the main drawback is the potential for "payment shock" when the loan transitions to principal and interest repayments, which are significantly higher.
3. Who is best suited for an interest-only loan? These loans are often suitable for investors seeking to maximise cash flow or individuals expecting significant income growth in the near future.
4. Can I switch from an interest-only loan to a principal and interest loan? Yes, this is possible. Many lenders allow you to switch loan types, but it's essential to understand any fees or conditions involved.
5. How does an interest-only loan affect my home equity? Since you're not paying down the principal during the interest-only period, your equity won't increase unless property values rise.
6. Is it harder to qualify for an interest-only loan? Generally, yes. Lenders often have stricter criteria, requiring a strong credit score and a higher deposit compared to standard loans.
7. How can Esteb and Co assist me with an interest-only loan? Our team of expert mortgage brokers can guide you through the process, leveraging our access to over 83 lenders to find the best possible terms and rates for your situation.