Broker guide
Interest Only Home Loan Rules and Repayment Risks
Paying interest only on a home loan for an investment? Check permitted periods, LVR, serviceability, extension rules and the repayment reset.
- Published
- Updated
An interest only home loan lets the borrower pay just the interest for a set period the lender approves, such as five years, while the balance stays the same. When the period ends, the loan switches to principal and interest over the shorter remaining term, so repayments rise.
On a fictional $700,000 loan at 6.00% over 30 years, interest-only repayments are $3,500 a month. After five years they rise to $4,510, which is $313 a month more than principal-and-interest repayments from the start would have been. That jump, and the lender’s approval for each interest-only period, decide whether the structure suits an investor’s plan.
Establish the Purpose
An interest-only request needs a documented reason that matches the borrower’s objective, cash flow and exit plan. Investment loans and owner-occupied loans can both have interest-only periods, but the Australian Prudential Regulation Authority (APRA), CommBank, Westpac and ANZ apply tighter limits to owner-occupiers.
APRA sets that expectation for banks in its June 2025 prudential practice guide APG 223. APRA expects a bank to approve interest-only owner-occupier loans only where there’s a sound and documented economic basis. The basis can’t be that the borrower can’t afford principal-and-interest repayments.
Investor and Owner-Occupier Requests Compared
The difference shows in the periods lenders allow. These rules come from CommBank’s March 2026 Interest Only switching guide and the Westpac and ANZ interest-only pages as at October 2026.
| Lender | Owner-occupied loan | Investment loan |
|---|---|---|
| CommBank | 5 years in total over the life of the loan | 15 years in total, with no more than 5 years at a time |
| Westpac | Up to 5 years | Up to 15 years, subject to approval and eligibility |
| ANZ | Periods of 1 to 5 years | Periods of 1 to 5, 7 or 10 years |
Macquarie’s broker interest-only page, as at October 2026, lists the reasons it accepts. They include a temporary drop in income, such as approved leave from work, and creating funds for investment. Tax, financial or accounting reasons also qualify, and the reason must match the loan purpose.
So don’t assume every interest-only applicant is an investor. A borrower on parental leave might want two years of lower repayments on their own home. Their purpose and the length of the need then decide the request.
Record Why Interest-Only Repayments Fit
The Australian Securities and Investments Commission (ASIC) shows how the length of the need decides suitability in Example 38 of its December 2019 Regulatory Guide 209. A first home buyer’s partner was returning to work in 18 months, so a two-year interest-only period was likely “not unsuitable”. A five-year period would run past the need and cost more, so it may be unsuitable.
Record the request against the borrower’s facts in the file notes before choosing a lender.
- Write the objective in the borrower’s words, such as lower repayments while they pay down a non-deductible home loan.
- Show the monthly cash flow with interest-only repayments and again with principal-and-interest repayments.
- Match the requested period to how long the lower repayments are needed.
- State the planned exit, such as reverting to principal and interest, selling or refinancing, with the numbers that support it.
- Note why principal-and-interest repayments from the start don’t meet the objective.
Under the best interests duty, these notes show how the structure fits the client. They also give the lender the documented basis that APRA’s guide describes.
Lender Eligibility
Lenders differ on the interest-only period, total time allowed, evidence and loan-to-value ratio (LVR) limit, while APRA sets the same minimum servicing test for every bank. The comparison below uses one fictional investor so the differences come from policy, not borrower facts.
The fictional investor is buying an $875,000 investment property with a $700,000 loan, which is an 80% LVR. The loan has a 30-year term and a 6.00% variable rate. The investor wants five years of interest-only repayments and plans to revert to principal and interest afterwards.
The table uses CommBank’s March 2026 Interest Only switching guide and the Westpac, ANZ and Macquarie pages as at October 2026. It shows how each lender treats that request.
| Lender | Five-year period | Further periods | Purpose | Evidence | Servicing condition |
|---|---|---|---|---|---|
| CommBank | Available, in whole years for a new loan | Up to 15 years in total for an investment loan, with none in the last 5 years of the loan term | Owner-occupied and investment loans | Evidence such as income, liabilities and expenses, plus an eligibility assessment | Must afford the higher principal-and-interest repayments at expiry without undue hardship |
| Westpac | Available | Up to 15 years in total for an investment loan, subject to approval | Owner-occupied and investment loans | Income, expenses and liabilities for an extension | Approval and eligibility criteria apply to each period |
| ANZ | Available | 7- or 10-year periods for an investment loan | Owner-occupied and investment loans | An eligibility assessment, and possibly a Statement of Position form showing income, liabilities and expenses | Assessment of the borrower’s financial position |
| Macquarie | Available, in periods of 1 to 5 years | A further 5 years after a full credit assessment | Accepted reasons that must match the loan purpose | A variation application, updated financial documents and a completed serviceability calculator for a switch or extension | Full credit assessment for each new period |
On LVR, Westpac’s broker policy page, as at October 2026, allows up to 90% for an interest-only investment loan, including lenders mortgage insurance (LMI). CommBank’s March 2026 guide lists the LVR among the credit policy limits it checks when a request is made. At 80%, the fictional loan sits inside Westpac’s limit and needs no LMI.
Above 80%, the LMI insurer’s limits also apply. Helia’s 10 August 2026 underwriting guidelines allow up to 95% LVR when the loan converts to principal and interest within 10 years. A loan that stays interest only beyond 10 years is capped at 90%, including any premium added to the loan.
Servicing Under the Same Facts
APRA’s June 2025 APG 223 expects banks to assess interest-only loans on principal-and-interest repayments over the term left after the interest-only period. The assessment rate must be at least 3 percentage points above the loan rate. All four lenders are banks, so this test applies to each of them.
For the fictional investor, the test uses a 9.00% assessment rate over the remaining 25 years. That gives an assessed repayment of $5,874 a month, against the $3,500 the investor actually pays during the interest-only period. A 30-year principal-and-interest loan would be assessed at $5,632, so the interest-only request lowers borrowing power rather than raising it.
Each lender then applies its own expense, income and buffer inputs to that repayment. Bulma’s Policy Advisor puts one interest-only question to a shortlist or to all 52+ lenders it covers. It returns a side-by-side table with each lender’s quoted policy wording and names the lenders whose policy doesn’t address the point.
Assess Reversion
When principal repayments begin, the fictional repayment rises from $3,500 to $4,510 a month, a $1,010 increase of about 29%. The balance is still $700,000, and it now has 25 years to be repaid instead of 30.
| Fictional loan of $700,000 at 6.00% | Months 1 to 60 | Months 61 to 360 | Balance after 5 years |
|---|---|---|---|
| Principal and interest for 30 years | $4,197 | $4,197 | $651,380 |
| Interest only for 5 years, then principal and interest | $3,500 | $4,510 | $700,000 |
The borrower needs room for the $4,510 repayment from month 61. That figure assumes the 6.00% rate holds, and a higher rate at reversion raises it further.
Extensions and Refinancing Are Fresh Decisions
A further interest-only period is a new lender-policy and affordability decision, never an automatic rollover. APRA’s June 2025 APG 223 expects a bank to run a new serviceability assessment when a borrower switches to interest only or extends an existing period.
Lenders apply that in their own processes, as shown in CommBank’s March 2026 guide and the Westpac, ANZ and Macquarie pages as at October 2026.
- CommBank asks for updated evidence of income, liabilities and expenses before it agrees to an extension.
- Westpac asks for income, expenses and liabilities and tells borrowers to start well before the expiry date.
- ANZ says its extension application may take up to four weeks.
- Macquarie’s variation page requires a credit assessment and usually a valuation. It can waive the valuation when the LVR was under 65% at original settlement.
Every extension shortens the remaining amortisation term. A second five-year period on the fictional loan leaves 20 years, so the principal-and-interest repayment from year 11 becomes $5,015. CommBank’s guide also bars interest-only repayments in the last 5 years of the loan term.
Refinancing to another lender for a new interest-only period means a full application. The new lender assesses servicing over the term left after the new period and sets the LVR from its own valuation. If the property’s value has fallen, the higher LVR can push the loan past a lender’s or insurer’s limit.
Changing a Home Loan to Interest Only
A switch from principal and interest to interest only on an existing loan needs lender approval. CommBank’s March 2026 guide permits a switch only where it’s satisfied the borrower can afford the higher repayments at expiry without undue hardship. Its check includes the remaining loan term after the interest-only period.
A fixed rate can also limit a change. Westpac’s interest-only page, as at October 2026, allows a new repayment type only after the fixed term ends and charges break costs for an earlier change. ANZ sets the interest-only period on an ANZ Fixed loan to the same length as its fixed period.
The fixed versus variable guide covers the wider choice between rate types.
Repayments During and After the Interest-Only Period
Paying interest only on a home loan covers the interest charged each month and nothing more, so the principal stays unchanged until the approved period ends. Then the loan switches to principal and interest, and each repayment then reduces the balance over the remaining term.
The monthly interest-only repayment is the loan balance multiplied by the annual interest rate, divided by 12. For the fictional loan, $700,000 multiplied by 6.00% and divided by 12 gives $3,500 a month. That’s $697 a month less than the $4,197 principal-and-interest repayment, which is the main advantage of interest-only repayments.
Interest-Only and Principal-and-Interest Repayments Compared
With the same $700,000 balance, 6.00% rate and 30-year term, the two repayment types compare like this.
| Fictional loan of $700,000 at 6.00% over 30 years | Principal and interest throughout | 5 years interest only | 10 years interest only |
|---|---|---|---|
| Repayment during the interest-only period | Not applicable | $3,500 | $3,500 |
| Repayment after it ends | $4,197 for the whole term | $4,510 over 25 years | $5,015 over 20 years |
| Total interest over 30 years | $810,867 | $863,033 | $923,604 |
| Extra interest compared with principal and interest | None | $52,166 | $112,737 |
The figures assume the rate stays at 6.00% for 30 years, with no fees, extra repayments or redraws. They’re rounded to the nearest dollar.
Rounding, Daily Interest and Lender Differences
The divide-by-12 formula gives an average month. CommBank’s March 2026 guide calculates the interest-only payment from the rate, the balance and the number of days in the repayment month.
On that daily basis, the fictional loan accrues $115.07 a day, which is $700,000 multiplied by 6.00% and divided by 365. A 31-day month then costs $3,567.12, a 30-day month $3,452.05 and a 28-day month $3,221.92.
The rate can differ too. CommBank’s guide says its interest-only rates are higher than its principal-and-interest rates, and a rate loading widens every gap in the table above. Use the lender’s actual rate and repayment dates for a client’s figures.
Extra Principal Payments, Offset Balances and Scheduled Principal
The actual product terms decide whether extra principal payments are allowed during the interest-only period. Westpac’s interest-only page, as at October 2026, says extra accessible funds in the loan account help reduce the loan balance.
An extra payment lowers the balance, so the next interest-only repayment falls. If the fictional borrower pays an extra $20,000, the repayment drops to $3,400. At reversion, the principal-and-interest repayment over 25 years is $4,381 instead of $4,510.
An offset balance works differently, because the loan balance itself doesn’t fall. CommBank’s interest-only page, as at October 2026, says interest isn’t charged on the part of the loan equal to the linked offset account balance. Unless the borrower pays the offset money into the loan, the reversion repayment is still calculated on $700,000.
A scheduled principal repayment is the part of each principal-and-interest repayment that the loan contract requires. An extra payment during the interest-only period is voluntary, and the minimum repayment stays interest only. Whether a specific interest-only product can link an offset account is covered in the offset account policy guide.
Review the Risks
Interest-only repayments cost more in total interest. They also leave the borrower dependent on the property’s value and on a future lender decision. Weigh each risk against the documented objective before recommending the structure.
Total interest rises with every interest-only year. On the fictional loan, five years add $52,166 and ten years add $112,737 compared with principal and interest, before any interest-only rate loading.
Valuation risk grows because the borrower builds no equity through repayments. Moneysmart’s interest-only home loans page, updated 29 July 2026, says a borrower whose property doesn’t rise in value builds no equity, which adds risk in a downturn. A lower valuation raises the LVR at the next extension or refinance.
Refinance assumptions can fail. The fictional plan assumes a 6.00% rate, so if the rate is 7.00% at reversion, the 25-year repayment is $4,947 instead of $4,510. A tighter lender policy or a lower valuation can also block a further interest-only period, so the plan has to work at principal and interest.
Tax benefits are possible, not certain. Moneysmart lists higher tax deductions for investors among the advantages, and CommBank’s March 2026 guide calls them potential tax benefits and recommends independent tax advice. A deduction lowers the after-tax cost of the interest, but the borrower still pays the extra interest.
Future growth isn’t certain either, so don’t build the exit on it. A plan that relies on selling at a higher price fails if the market falls during the interest-only period. When the borrower can afford the reversion repayment and the period matches a documented objective, the request is ready to go to the lenders whose policy fits it.
