An interest only payment is a type of home loan repayment where you only pay the interest on the loan for a specific period, usually up to five years. During this time, your loan balance—or principal—remains unchanged. This structure can ease financial pressure in the short term, particularly for first-time buyers or property investors looking to manage cash flow.
Unlike standard principal-and-interest mortgages, an interest only payment plan delays any reduction in the loan amount until after the interest-only period ends. Once it does, your repayments increase as you begin paying off both principal and interest.
How an Interest Only Payment Impacts Your Mortgage
The biggest advantage of an interest-only loan is reduced monthly repayments—at least initially. For example:
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A $350,000 loan at 3% over 30 years:
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Interest-only repayment: ~$875/month
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Standard repayment: ~$1,476/month
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That’s a monthly saving of $601 during the interest-only period. However, after this phase ends, your repayments will rise, often significantly.
Also, because you’re not reducing your loan balance, home equity doesn’t grow unless your property increases in value.
Pros and Cons of Interest Only Payment Loans
Pros
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Lower initial repayments
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More cash flow for renovations or investments
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Tax benefits for investors (check with your accountant)
Cons
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No reduction in principal during interest-only period
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Higher payments later
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Risk of negative equity if property values fall
Risks
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Higher repayments after the interest-only period
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No equity growth unless property value increases
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Stricter lending criteria from banks
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Should You Choose an Interest Only Payment
Interest only payment plans suit borrowers with short-term financial goals or investment strategies. However, they’re not ideal for everyone. If you’re unsure, consult a or use a to compare options.
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