The Future of Interest-Only Home Loans - Mortgage DomayneSkip to main content

The Future of Interest-Only Home Loans

August 29, 2017

Interest only (IO) loans have always been a go-to option for many first home buyers. The IO process allows home buyers to only pay the interest on their home loan for the first few years, before they begin paying off the principal of the loan. It’s also a favourable and flexible option for investors looking to develop their property portfolios. IO loans have been a popular option for Australians in the past, however the recent hike in home loan interest rates has created concern amongst the banks, who are now liable to reject requests for IO loans. If the economy reaches a lull and the housing market suffers, the banks will be in trouble. Amidst this growing concern, the banks have tightened the lending criteria, and have made alterations to the process used to assess an applicant and their ability to make repayments.


IO loans are now looking less favourable in comparison to principal and interest (P&I) loans. IO loans are now more expensive, and bank analysts are urging home buyers to make the switch. Despite it being a less profitable option for the banks, there are fewer risks involved and at this point in time, it’s believed to be more economically rational for buyers.

If IO home loans are becoming more expensive and more difficult to attain, are they still viable?

Is an Interest-Only Loan Still on the Cards?

While the banks are attempting to direct buyers towards P&I loans by decreasing IO eligibility, IO loans are still an option for those who slot into the refined criteria. Investors with a large income, borrowers with a short-term decrease in income, and borrowers seeking tax-effective structures are still in the mix and will benefit from the IO structure. The flexibility of an IO loan is still appealing, and borrowers can benefit in career, personal, and investment endeavours. However, there is concern that the flexibility of an IO loan may not be worth the loss. Banks are beginning to disregard the benefits of flexible loan repayments, and are more focused on preventing customers from committing to more than they can afford.

Some banks are now only granting IO loans to customers with a high loan-to-income ratio. Figures are yet to be specified, however this reformed system will make it impossible for average earning Australians to take out an IO loan.

Interest only mortgage loans are still a viable option, however for far less Australians, especially first home buyers. P&I loans are becoming a more affordable option for the average Australian.

What are the Risks?

As with all repayment schemes that are subject to market trends, there are risks involved. The main risks involved with an IO loan include:

  • The home may not appreciate as much as the buyer had hoped, and if the property market plummets, the home may depreciate
  • It places an added stress on the buyer’s income, and its failure to increase when mortgage repayments do could lead to financial burden
  • Refinancing may not be possible at the end of the IO period
  • If home and business loan interest rates continue to rise, buyers with an IO loan will be forced to pay a far higher amount than those with P&I loans

If the home buyer’s income is strong and looks promising for the years to come, the flexibility of an IO loan may overcome the perceived risks. Home buyers most susceptible to these risks are the ones affected by the banks’ new, and stricter approach to IO loans.

Gain a Better Understanding

Every individual is different, and no one loan is suitable for everyone. To find out more and explore your options, contact the expert team at Mortgage Domayne. Together we’ll find the best and most affordable home loan option to benefit you long term.

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