Interest Only - Risks and Benefits

An interest-only home loan is a type of loan where your repayments only cover the interest on the amount you have borrowed, during the interest-only period. There is no reduction in the principal. This type of home loan will have lower repayments in the short term and may provide greater tax deductions on an investment property but will be more expensive in the long run. The interest rate may be higher for an Interest Only loan as compared to a Principal & Interest loan.

Additional loan repayments are often not allowed with fixed rate loans or repayments may be capped at a low amount or only permitted with a fee. Any redraw or offset facility may also not be offered on a fixed rate loan. Fixed rate loans may have a break fee if you change or pay off your loan within the fixed rate period

For an initial period (for example, five years), your repayments only cover interest on the amount borrowed. You aren't paying off the principal you borrowed, so your debt isn't reduced. Repayments may be lower during the interest-only period, but they will go up after that. Make sure you can afford them. 

Pros
  • Lower repayments during the interest-only period could help you save more or pay off other more expensive debts.

  • May be useful for short-term loans, such as bridging finance or a construction loan.

  • If you're an investor, you could claim higher tax deductions from an investment property.
     

Cons
  • The interest rate could be higher than on a principal and interest loan. So you pay more over the life of the loan.

  • You pay nothing off the principal during the interest-only period, so the amount borrowed doesn't reduce.

  • Your repayments will increase after the interest-only period, which may not be affordable.

  • If your property doesn't increase in value during the interest-only period, you won't build up any equity. This can put you at risk if there's a market downturn, or your circumstances change and you want to sell.

https://moneysmart.gov.au/home-loans/interest-only-home-loans