What is interest only?
Interest Only Repayments
Home loan repayments are generally made up of two components: the principal (your loan balance) and the interest (the amount you’re charged on the outstanding loan balance).
‘Interest only’ means you pay only the interest component on your loan for a select period of time. During this time, you’ll only be paying any accrued interest and won’t be paying off any of the principal amount.
What you need to know
- You’ll have smaller loan repayments during the interest only period, allowing more cash on hand for other purposes.
- However, while you may pay less during the interest only period, since you’re not paying off the principal, your repayments will be higher for the remainder of the loan term and you’ll typically pay more interest overall.
- The interest rate during the interest only term is typically higher than the principal and interest rate, meaning you will likely pay more interest over the life of the loan.
- There are typically limits on how long you can have an interest only period – your loan will automatically switch to principal and interest repayments after this period.
Let’s look at this example
If you take out a $500,000 loan with a 30 year loan term and have the option to pay
principal and interest at 3.85% or interest only for 3 years at 4.25%, this will be the
impact on your repayments.
- Principal and interest
You’ll pay $2,345 per month from the first year (subject to change based on
interest rates) - Interest only
You’ll pay approximately $1,771 for the first 3 years, however in year 4 if you start paying principal and interest, your repayments will increase to $2,597.
Need more information?
Interest only requirements may differ between lenders so it’s important to understand your chosen lender’s requirements.
It should be remembered that this fact sheet is intended to provide general information of an educational nature only.
It does not have regard to the financial situation or needs of any individual and must not be relied upon as financial
product advice.
As this information has been prepared without considering your objectives, financial situation or needs you should, before acting on this, consider the appropriateness to your circumstances. As always, if you have any questions, you can contact
your broker.
Licensing statement: Rayne Finance ABN [70 605 100 838] is authorised under LMG Broker Services Pty Ltd Australian Credit Licence 517192. Disclaimer: (1) As with any financial scenario there are risks involved. This information provides an overview or summary only and it should not be considered a comprehensive analysis. You should, before acting in reliance upon this information, seek independent professional lending or taxation advice as appropriate and specific to your objectives, financial circumstances or needs. This publication is provided on the terms and understanding that: (2) LMG Broker Services Pty Ltd, Rayne Finance (Seed Lending Pty Ltd) and the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication. (3) LMG Broker Services Pty Ltd, Rayne Finance (Seed Lending Pty Ltd) and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to the maximum extent permitted by the law to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication.
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